Q2 2022 Matthews International Corp Earnings Call
Greetings and welcome to the Matthews International second quarter fiscal year 2022 conference call.
At this time all participants are in a listen only mode.
A brief question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Bill Wilson Senior director of corporate development. Thank you Sir you may begin.
Thank you Christine good morning, everyone and welcome to the Matthews International second quarter fiscal year 2022 earnings Conference call.
Stilwell senior director of corporate development.
With me today are Joe Gorder, Lacy, 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 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 it surfaces and engineered products businesses from the <unk> brand solutions segment to the industrial technology segment.
Results reflect the new segmentation.
As a reminder, any forward looking statements in connection with this discussion are being made pursuant to the safe Harbor provisions of the <unk>.
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 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.
Connection with any forward looking statements and non-GAAP financial information.
To read the disclaimer included in today's presentation materials located on our website.
Now I will turn the call over to Steve.
Thank you Bill good morning.
In reviewing our results for the fiscal 2022 second quarter some of the key highlights included.
First we reported a new record for quarterly sales and another consecutive quarter of year over year consolidated sales growth.
Its holiday sales increased to 445 million for the current quarter compared to $417 $2 million, a year ago, representing an increase of $27 8 million or six 7%.
Each of our business segments reported sales growth for the quarter.
Second the company's industrial technology segment, which includes the energy solutions warehouse automation and product identification businesses reported sales of $78 $2 million for the fiscal 2022 second quarter compared to $65 $3 million last year representing <unk>.
An increase of $12 $9 million or almost 20%.
Adjusted EBITDA for this segment grew to $14 $4 million compared to $8 $3 million last year.
These increases were mainly driven by continued growth in our energy solutions business and higher warehouse automation and product identification sales.
Third with respect to consolidated adjusted EBITDA the benefit of higher consolidated sales was significantly mitigated by the unfavorable impacts of increased material costs as well as other inflationary impacts, including increased labor and freight costs.
Fourth the company reported an $83 $1 million reduction in the outstanding debt balance during the fiscal 2022 second quarter.
As a result, the company's net debt, which represents debt less cash was below $700 million as of March 31 2022.
During the quarter the company replaced its existing receivable securitization facility with a receivables purchase agreement. This resulted in $75 million reductions in trade receivables and death.
Next I'll provide a summary of our key earnings metrics on a GAAP and non-GAAP adjusted basis for the quarter ended March 31 2022.
On a GAAP basis, the company reported a net loss of $1 9 million or <unk> <unk> per share <unk>.
Compared to net income of $5 million or <unk> 16 per share for the same quarter last year gap.
GAAP earnings for the current quarter included asset write downs totaling $10 $5 million related to the Russia, Ukraine conflict.
In addition, both periods reflected the impacts of intangible amortization expense, primarily from the acceleration of amortization of certain intangible assets and the SDK brand solutions segment.
Consolidated intangible amortization expense was $12 million or 28 per share for the fiscal 2022 second quarter compared to $22 9 million or 52 per share a year ago.
On a non-GAAP basis, adjusted EBITDA, which represents net income before interest expense income taxes, depreciation and amortization and other adjustments for.
For the fiscal 2022 second quarter was $55 $2 million compared to $69 million last year the.
The benefit of the company's consolidated sales growth was offset for the quarter, primarily by higher material costs and increased labor and freight costs. In addition, the current quarter was impacted by unfavorable sales mix and the SDK brand solutions segment.
Adjusted earnings per share was <unk> 74 for the current quarter compared to 89 cents last year, primarily reflecting the reduction in adjusted EBITDA.
Please see the reconciliations of adjusted EBITDA and non-GAAP adjusted earnings per share in our earnings release.
For the six months ended March 31, 2022, consolidated sales increased $883 6 million compared to $803 $8 million, a year ago, representing an increase of $79 $7 million or almost 10%.
Similar to the results for the second quarter each of our business segments reported sales growth on a year to date basis.
On a GAAP basis, the company reported a year to date net loss of $21 7 million or <unk> 68 per share compared to net income of $3 2 million or <unk> 10 per share last year.
GAAP earnings for the current year included non service pension costs of $31 4 million, which is.
<unk> related to the settlement of the company's principal pension plans.
In addition, as I noted earlier the second quarter of this year included asset write downs totaling $10 $5 million related to the Russia, Ukraine conflict.
Both year to date periods reflected the impacts of accelerated intangible amortization expense consolidated intangible amortization expense was $33 5 million or <unk> 79 per share for the first six months of fiscal 2022 compared to $38 $2 million or <unk> 88 per share a year ago.
<unk>.
On a non-GAAP basis adjusted EBITDA for the six months ended March 31, 2022 was $108 5 million compared to $115 $7 million last year.
The benefit of the Companys consolidated sales growth was offset primarily by higher material costs and increased labor and freight costs. In addition, the current year was impacted by unfavorable sales mix and the SDK brand solutions segment.
Year to date adjusted earnings per share was $1 48 as of March 31, 2022, compared to $1 57 last year, primarily reflecting the reduction in adjusted EBITDA. The decline was partially offset by lower interest expense in the current year.
Investment income for the quarter ended March 31, 2022 was a loss of $327000 compared to income of $1 million for the same quarter a year ago.
Investment income for the six months ended March 31 2022.
$676000 compared to $2 million last year invest.
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 fiscal 2022 second quarter was $6 3 million compared to $7 2 million a year ago year to date interest expense was $12 8 million for fiscal 2022 compared to $15 million last year, the declines reflected lower average debt levels and low.
Our average interest interest rates for the current year.
Other income and deductions net for the quarter ended March 31, 2022 represents pre tax income of $562000 compared with net expense of $2 $6 million a year ago.
The significant change primarily reflected a reduction in non service pension costs as a result of the company's settlement of its principal pension plan.
Year to date other income and deductions net for fiscal 2022 represented net expense of $31 2 million compared to net expense of $4 $3 million last year. The year to date change primarily reflected a significant first quarter charge in the current year as a result of the settlement.
The company's principal pension plan.
Other income and deductions include the non service portion of pension and post retirement costs as well as banking related fees and the impact of currency revaluation gains and losses on foreign denominated cash and debt balances.
The company's consolidated income taxes for the quarter ended March 31, 2022 were $3 3 million.
Compared to $972000 a year ago with.
The significant increase for the current quarter, primarily reflected the impact of the non deductible asset write downs related to the Russia, Ukraine conflict.
For the six months ended March 31, 2020 to the company's consolidated income taxes reflected a benefit of $3 4 million.
Compared to expense of $5 million last year the benefit for the current year, primarily reflected the tax benefit of the first quarter pension costs.
Please turn to slide five to begin a review of our segment results.
Sales for the industrial technology segment were $78 $2 million for the fiscal 2022 second quarter compared to $65 3 million a year ago, representing an increase of $12 9 million or.
Or approximately 20%.
The growth resulted primarily from higher sales for the energy storage solutions business.
In addition, warehouse automation and product identification sales improved for the quarter.
Backlogs and incoming order rates for these businesses continues to be strong through the fiscal 2022 second quarter.
Year to date sales for the industrial technology segment were $152 $5 million through March 31, 2022, compared to $118 7 million a year ago, representing an increase of $33 8 million or approximately 28, 5%.
As a result of this sales growth adjusted EBITDA for the industrial technology segment was $14 $4 million for the fiscal 2022 second quarter compared with $8 $3 million a year ago.
The increase also reflected improved margins and lower pension costs, which were partially offset by higher labor costs.
On a year to date basis, adjusted EBITDA for the industrial technology segment, nearly doubled to $21 6 million compared.
Compared with $11 $3 million last year.
Please turn to slide six.
Amortization segment sales for the fiscal 2022 second quarter were $220 million compared to $205 $5 million, a year ago, representing an increase of $14 5 million or seven 1%.
Growth was primarily the result of higher cemetery memorial product sales and increased prices.
Casket unit sales volumes were slightly lower for the current quarter as the impact of COVID-19 begins to subside.
The company also completed an acquisition of a small cemetery products business during the fiscal 2021 second quarter.
For the first six months of fiscal 2022, memorialized <unk> segment sales were $430 7 million compared.
Compared to $388 $7 million, a year ago, representing an increase of $42 million or 10, 8%.
Higher unit volumes of Caskets in Cemetery Memorial products. In addition to increased prices were the primary drivers to the year to date sales improvement.
Memorial <unk> segment adjusted EBITDA for the fiscal 2022 second quarter was $42 9 million compared.
Compared to $51 $6 million a year ago the.
The favorable effect of higher sales was offset by the significant unfavorable impacts of higher material costs, mainly steel lumbar and bronze compared to a year ago as well as increased labor and freight costs.
Realizations segment adjusted EBITDA for the six months ended March 31, 2022 was $86 3 million compared.
Compared to $95 $7 million last year.
Please turn to slide seven.
Sales for the SDK brand solutions segment improved to $146 8 million for the quarter ended March 31, 2022, compared to $146 $4 million a year ago.
The increase primarily reflected higher merchandising related sales and growth in the segment's European packaging business.
These increases were significantly offset by changes in foreign currency rates rates, which had an unfavorable impact of $7 million on the segment's current quarter sales compared with the same quarter last year.
Year to date sales for the SDK brand solutions segment were $304 million for fiscal 2022.
Compared to $296 $4 million last year.
Similar to the second quarter sales growth for our merchandising business and our brand packaging business in Asia was significantly offset by unfavorable currency rate changes.
These changes had an unfavorable favorable impact of $9 $4 million on the segment's current year sales compared to last year.
Fiscal 2022 second quarter adjusted EBITDA for the SDK brand solutions segment was $13 5 million compared to $18 $4 million a year ago. The decline primarily reflected the impact of an unfavorable change in sales mix from a year ago increased labor costs New <unk>.
Client onboarding costs, and higher travel and entertainment expenses.
The segment sales mix for the current quarter reflected a reduction in higher margin agency and photography related sales, which were offset by increased merchandising sales. In addition production inefficiencies related to remote work environments impacted operating margins for the quarter.
Adjusted EBITDA for the SDK brand solutions segment was $28 9 million for the first six months of fiscal 2022 compared to <unk> 40 $42 million last year.
Please turn to slide eight.
Outstanding.
Ending debt was $753 million at March 31, 2022, compared to $836 1 million at the end of the first quarter.
$763 7 million at September 32021.
Net debt, which represented debt less cash at March 31, 2022 was $699 $2 million and our leverage raised net leverage ratio was three two.
The leverage covenant covenant ratio and our domestic credit facility is based on net debt.
Significant portion of the debt reduction resulted from the replacement of our existing securitization facility with a receivables purchase agreements that resulted in reductions in our debt and trade receivables balances.
With respect to our balance sheet. It is important to highlight that since the beginning of the pandemic. The quarter ended March 31, 2020, we have reduced our outstanding debt balance by over $200 million.
And our accrued pension balance by over $100 million.
Cash flow provided by operating activities for the fiscal 2022 second quarter was almost $100 million compared to $56 9 million a year ago the increase.
Primarily reflected the sale of trade receivables totaling $75 million under the company's new receivables purchase agreement that I just noted.
Cash flow provided by operating activities for the six months ended March 31, 2022 was $72 7 million compared to $92 $2 million last year.
This change included the contribution to the company's principal pension plan during the fiscal 2022 first quarter in connection with the planned termination and settlement.
Approximately 31 3 million shares were outstanding at March 31, 2022 during the recent quarter. The company purchased approximately 289000 shares under its share repurchase program at March 31, 2022, the company had remaining authorization of approximately $2.
3 million shares under the program.
Finally, the board yesterday declared a dividend of 22 per share on the company's common stock. The dividend is payable may 23, 2022 to stockholders of record May nine 2022.
This concludes the financial review and Joe will now comment on our company's operations.
Thank you Steve good morning.
We are pleased with our second quarter financial results. Despite the obvious challenges.
Continued supply chain challenges negative currency movement rapidly rising cost and the war in the Ukraine.
Combined to make an otherwise strong quarter more challenging than most.
Despite those challenges we delivered good results overall in exceptionally strong results in several of our businesses.
Each of our segments reported higher revenue than prior year, allowing us to report another record revenue for the quarter.
Our revenue growth was both volume and price driven at all businesses have raised prices to mitigate inflationary pressures.
Well as you might as you all know the timing of our price increases doesn't always match up with the increases in our costs.
Nice increases in the Memorial <unk> segment.
<unk> mitigates the declining volumes, resulting from the lower COVID-19 related deaths.
Again, this quarter I want to highlight the particularly strong performance in our recast industrial technology segments.
Which reported almost 20% revenue growth and almost a 75% increase in EBITDA versus prior year.
Although our energy storage business was the largest driver of this performance our warehouse automation and our product identification business continued their strong performance and also delivered significant year over year improvement as well.
As you are aware this segment represents our fastest growing businesses.
We expect these businesses to have an exceptional year with revenues on track to approach $300 million as our backlog in this segment alone still remained over $200 million.
Interest in our energy storage business remained strong, particularly in our proprietary dry electrode technology.
We are in continuing discussions with some of the world's largest auto industry participants who are seeking us out due to our demonstrated ability to produce dry electrode production level equipment.
We believe that dry electrode battery production will be the next generation of batteries to enter the market for many reasons, but most importantly, dry electrodes offer a significantly lower capital cost and a smaller footprint to produce versus wet electrodes.
We are very well positioned in this market with almost a decade of experience knowhow and intellectual property.
In our Memorialization segment continued strong top line performance, particularly in cemetery and funeral products was offset by rising commodity labor and freight costs.
Although this business has raised prices significantly further action may be necessary in the future to mitigate costs like higher labor, which are becoming a more permanent part of our cost structure.
And that's G. K the team continues to deliver topline organic growth was challenged by currency changes during the quarter.
In addition to currency EBITDA was impacted by significant product mix shifts and inflationary pressures affecting both our businesses and those are our most important consumer product companies and I'm sure you've heard this earning season several CPG clients has softened marketing spend resulting in lower volume.
Breast UK as they look to offset the rising commodity costs and their own businesses.
Teekay has also implemented pricing actions to offset the rising cost of labor.
During the quarter. We also took further action to reduce our debt, bringing our total debt reduction during the two years of the pandemic to over $200 million.
As I stated last quarter, we terminated our U S defined benefit plan and paying off the benefits to our retirees and employees.
This reduced our pension plan since the start of the pandemic by over $100 million.
In total we have reduced total company obligations and debt by over $300 million to the benefit of our shareholders since the beginning of the pandemic.
Yeah.
We are satisfied with our operating performance for the quarter and confident in our ability to continue to deliver solid results as we look to the balance of the year. There is still even more uncertainty than before.
Larry pressures do not.
Do not appear to be subsiding.
The warranty Ukraine is causing concerns around Europe , where we have significant presence, particularly with SDK.
Also significant changes in currency rates are impacting our expectations for the balance of the year all of these factors and more make predicting our performance for the balance of the year very difficult.
Despite these challenges our current estimates remained strong thanks to our strong backlogs and many of our businesses and the pricing actions taken to date.
As a result, we continue to believe that we can deliver at least $220 million of EBITDA on a full year basis.
For some of the uncertainties that we see including the currency fluctuations, we would expect even better results, but for now this is our best estimate.
Now, let's open it up for questions.
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.
A confirmation tone will indicate your line is in the question queue.
You May press Star two if you would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
One moment, please while we poll for questions.
Okay.
Thank you. Our first question comes from the line of Daniel Moore with CJS Securities. Please proceed with your question.
Thank you good morning, Joe Good morning, Steve.
Let me start with start with industrial technologies, where margins are clearly a standout maybe talk about some of the drivers there obviously mix was favorable to some extent but.
But if you could kind of dig in a little bit more and just talk about the sustainability of that.
And the margins generated in this quarter.
So as we look as I said in my comments that each one of the business has performed well and had significant improvement on a year over year basis volume drives our performance on the bottom line, we're expecting all of those businesses to pretty much sustained that kind of profitability and the kind of performance we've talked about for the quarter.
For the balance of the year My comments said it we're gonna be approaching $300 million in this segment and almost $60 million of EBITDA.
We've been talking about this for several years now.
I think we're just at the beginning these results do not even include our new product, which we are very very confident about it in our product identification business that comes into the market at the end of this calendar year.
Very helpful.
And then maybe switching to memorial position.
I think you said funeral home product volumes were down slightly not a surprise, obviously given the extremely difficult comp just trying to get a sense of how quickly volumes are returning to more normal levels.
On that side of the Memorialization business.
Yes, I mean, the volumes are already coming back down into normal they've been there for about a month now at this point or better than a month at least the issue that I think.
The Street.
Misunderstanding is that the pricing actions that we've taken to date really youre going to mitigate if not offset completely.
Pricing those volume reductions.
That together with extremely strong backlogs in our cemetery products business, we're expecting another strong year in that business that segment this year as well.
Got it and then the follow up to that is you just in terms of that that the lag in terms of it is as far as pricing versus the inflationary pressures.
How long deep when do we expect to see margins.
Maybe start to trend back to more normal levels in that business and then I'll jump back in queue. Thanks.
I would expect that some.
We've had some pricing action taken throughout the second quarter that will only benefit at a part of the quarter, we'll see some of that benefit.
Going further into this quarter getting better and given where our cost structures are we would expect to see further pricing action throughout the year. So I would tell you.
Whenever normal may be in your mind in terms of margins I would tell you that we will start to see that more towards the latter part of the year.
As we move forward, but the volumes will remain elevated.
I mean, the revenues remain elevated excuse me understood. Okay. Thanks ill jump back with a couple of follow ups.
Our next question comes from the line of Liam Burke with B Riley. Please proceed with your question.
Thank you and good morning, Joe Good morning, Steve.
Hi, Liam.
Joe could you talk a bit about cremation systems into Memorial Nation segment wasn't mentioned in your comments out of the bag how are the sales and how does the backlog look there.
So when we talk about that are human cremation unit were strong I mean.
Our order rates remain strong or elevated elevator doors, we're having some difficulty in the supply chain side of things getting things out, but we expect that to be a good contributor over the balance of the year and into next year as well.
And what assets had to be written down as a result of the Ukraine conflict.
Yes, I'll take that one we have we have a facility.
In Russia that serves primarily the tobacco market in Russia.
In our <unk> business.
Okay, and I'm presuming, it's uncertain how that.
Uh huh.
Shakeout.
Yeah, we've taken action to eliminate that but at this point in time, obviously the facility is still there.
Whether I'd ever comes back online or not is another story.
I guess my question is can you work around that.
And it's pretty sudden for Ya.
Through no fault of your own App.
Yeah, well I mean, obviously, the tobacco companies still exist and they were producing.
Product for other parts of Europe from there as well, we expect that that volume will just be shifted to other locations.
There has been disruption.
Great. Okay. Thanks, Joe Thanks, Steve.
Our next question comes from the line of Chris Mcginnis with Sidoti. Please proceed with your question.
Good morning, Thanks for taking my questions good morning.
If you could just start maybe with the inflationary environment.
Related to lithium could you just talk about you know is that helping drive more customers.
Customers.
Seek you out and your your option out can you just talk a little bit about that dynamics. Thanks.
Sure.
I would we don't as you know, Chris we don't produce the battery so everything I'm going to give you in term of feedback with respect to that is going to be anecdotal or related but obviously anything that would reduce the overall cost of producing a lithium ion battery.
Is going to be viewed favorably and in an environment, where the overall cost of the raw materials are going up our solution. The dry electrode solutions amongst the other benefits clearly is a lower cost of production and that.
That's going to drive it as lithium continues to go up as well as other raw materials associated with the production of the battery goes up.
All manufacturers will be looking for a lower cost to produce and this is the solution. So we think it's favorable for us.
And I guess.
No just conversation since last quarter to this quarter as it increased to stay the same I mean can you just give a little bit of color on that thank you.
Well, Chris we are actively talking to it.
Dozen or more.
Auto auto players and that includes the actual auto manufacturers as well as our OEM part manufacturers. So.
Those discussions continue on I would tell you.
We have interest both in our wet electrode capabilities as well as our dry.
There is some timing issues as to when those would actually come online. We continue to sell lab machines, which are the precursors to production machines as people try to formulate their own solutions.
For their for their own batteries so.
Discussions continue with extremely strong.
A lot of interest in us.
Trade shows that we've attended.
And obviously, we're still remain very very bullish on where this goes is it a direct line up probably.
Probably not.
Is it a.
What I would consider as long term.
Mid term a.
Very very successful and interesting business you bet.
Great I appreciate it just a couple more questions around industrial just with.
With automation or are you running into any any supply chain issues in getting product was talking to a company yesterday, where it's over a year out to get some of the equipment.
Can you just talk about the ramp of that business and the expectation there going forward.
There clearly is a supply chain issues as we look at our warehouse automation part of it obviously, there we sell software in some hardware into the into the warehouse automation business.
Companies around the country.
I would not tell you that we have significant issues in that business as much as our suppliers or excuse me our customers.
Whether it be conveyors sorters whenever it may be the hardware that they are trying to get their hands on it which is what we overlay our software on it has been challenging so it has delayed some installations and.
It causes challenging to get to recognize revenue on product. We have backlog that we have we have a very very strong backlog in that business as well when it comes to product identification. The team is struggling with what I would call componentry.
Whether it be the wafers that we use to produce our new product, whether it's or the circuit boards used to produce the drivers of those products. We are having some challenges, but they've done a pretty good job.
Of substituting and finding alternative solutions is a perfect nope.
As hampering us, but that is also what's causing the over $200 million of backlog in that segment that you see today.
I appreciate that Joe and then one just last one on the product identification.
Can you I mean is that you feel it sounds really confident that next year, it's going to be a big year for you.
Can you just talk about the stage of where you're at with the customer or are they starting to receive it.
Can you just provide a little bit more color on identification thing. So I would tell you. We are we are in beta plus with the spot with respect to our new product. It's out there the product's been out there for months. It is performing exactly as we expected in some cases better.
Our movement from what I would call lab production of a silicon chip.
It is.
Well, we're moving that production line to Teledyne Fab lab that fab lab has been very very very instrumental for us to understand what our ongoing capabilities are in terms of cost structure effectiveness and volumes and we remain bullish I mean is it going to be again, we caution that.
This is not going to be like we're going to launch it tomorrow, we're going to overtake the world, but the value proposition we have expected is coming true.
Okay, Great I appreciate it and then.
Steve a question for you just around the inflationary environment and then FX, maybe you just talk about the impact maybe FX on EBITDA in the quarter and then just kind of maybe the outlook in general.
Sure Yeah, the impact on EBIT for the quarter is is I'd say somewhere around the two $2 million to $3 million range in total.
But from a revenue perspective on a consolidated basis. It was over $11 million. So it certainly had a top line impact.
And as I mentioned before.
The impact of the SDK segment, particularly because when you look at the absolute reported growth in their top line.
It reports very small, but you have to keep in mind that there was a $7 million top line headwind in that business.
Mask, some growth, particularly on the merchandising side of that business.
I appreciate that and I'm sorry, the second part of your question.
It was just.
Yes, the impact when you look at your guidance going out there as well I mean, it feels like it would've been a little bit stronger if not given.
And then also obviously the FX.
Yeah. There's no question about that I mean from a bottom line standpoint.
Our results would have been significantly better but for the inflation on a top line standpoint, you know the interesting thing about that that we saw as Steve says $11 million plus or minus.
Currency fluctuation largely impacting the.
S T K side of the business.
What what is disappointing in that it reflects what we've been talking about for a while which has been some client wins that are ramping up as we speak that would otherwise being matched by the currency changes, we're saying, we don't know where that's going and I can tell you today is what the 29th of April and Euro is further degradation from where it was.
Before where that finishes out of the year, it's difficult to tell so I we're.
We're not we're not in the currency business, but it's not helpful.
Sure I understand thanks for taking my questions and good luck next quarter. Thank you. Thank you. Thank you.
Our next question comes from the line of Justin Bergner with Gabelli funds. Please proceed with your question.
Good morning, Joe Good morning, Steve.
Alright yesterday morning.
Apologies I got on the call little late so I.
I may ask questions on areas you've covered.
But just to clarify I guess the last line of questioning so the currency impact was $11 million in terms of revenue in two to 3 million EBITDA.
You mentioned inflation.
Okay no inflation.
Let's put it this way when he said it inflation, obviously inflation is impacting our bottom line more than we had anticipated.
And but pricing action is not fully implemented just yet.
Okay, but the actual 11 million two 3 million that was currency that was not.
That's hard that's a hard number that's correct inflation is much higher than that I expect.
Got it.
I guess secondly, just in ESG K business could you just if you haven't already maybe just talk to what's strong in what is challenged in that business looking into the second half.
So we have seen some of our largest CPG as you would know cut back on their marketing spend principally in North America and in Europe .
As a result of trying to offset their rising commodity costs. I mean, that's just the reality of finding ways to maintain their bottom line.
What theyre doing is cutting that cost and that's the challenge we saw this.
This quarter in particular going forward.
It's hard to tell.
Whether that this is not this cannot be a permanent.
Situation for them, we think marketing just as an evolutionary time it goes back and forth, but we are seeing strong retail experience I mean, as we said the reopening trade is coming back we hope that will continue throughout the balance of the year. We're also seeing a recovery in our private label business as we start to see.
Our retailers again, mostly grocers.
Get their supply chain in order and the big.
Again to refocus on our we are branding.
Remarketing.
The product on the shelf. So we're expecting it so the short story is difficult to tell what the CPG is we expect that comes back is it next quarter or the quarter after that it's difficult, but it does come back.
And but we're expecting stronger results as we've seen in our brand.
And our Merchandizing is brand experienced business as well as our private label business than we had prior year.
Got it and when you talk about merchandising that's synonymous with retail just yeah. It's yeah. It's yeah. It is retail.
We look at retail in two forms of private label, which is the product on the shelf that is owned by the retailer as well as in store marketing and experiences things like we do some work for some relatively large brands that are we.
We are in store displays and marketing efforts inside the store.
Got it alright, great and then.
You did 108 and a half million to EBITDA in the first half you know your guide is still.
The better than $220 million. So it seems like you have some headwinds in the second half and in parts of your business.
Maybe just what gets better to offset those headwinds and deliver a second half that's slightly better than the first half.
So if you would ask me that question.
Probably in January of this year, we would've told you it'd be a little better than that the currency has moved the wrong way. So we don't know where currency ends up for the balance of the year.
And we need.
We need some confirmation that we are able to deliver some of the large projects on the energy side within the within the balance of the second half that is not in our control whether they are facilities that are being built are our customers.
Or readiness to accept product has been one of the biggest challenges we have whether it be on energy whether it be on warehouse, whether it be in some of the cremation situations that we have our customer readiness.
As a precursor to recognizing revenue for us so we haven't been able to get it all.
Got it that's helpful.
One or two more questions if I may.
The step up in sequential margins in your industrial technologies business clearly you alluded to that as part of I think your annual outlook and some prior comments, but.
Was that expected what triggered that.
That's right.
As expected.
I mean here is the best way to frame that it kind of relates to the last question you asked.
It is expected and we hope that it is sustainable the issue is really not so much as it's the timing of customer readiness I mean, as I said before.
Well, we have very strong backlogs in our warehouse automation business, where the issue was really kept out of the warehouse is ready to accept software where the last usually the last player into a new warehouse or.
Our reconfigured warehouse, so we overlay our software over.
The underlying hardware, but the hardware has to get there first so it's those are the kinds of challenges. We're facing that are you know.
Really don't look to the quality of the business or the power or the kind of revenues excuse me kind of profitability, we expect it's tiny.
Got it so it seems like there was a favorable mix impact in the EBITDA margin for this quarter, but but not unexpected.
Yeah I mean.
Let me assure you that.
The entire business have been significantly better than what I would call.
Greater than expected inflationary pressures.
Got it and then lastly, you talked about I think securitizing, some receivables I'm, assuming those went off balance sheet is that the correct interpretation and you know can you share that number should I just wait for the queue.
Justin that's entirely correct. So in the past we had our prior to this year, we had a receivable securitization facility in place.
We've replaced that with.
Our receivables purchase agreement basically still debt secured by receivables, but it.
It was I had no economic has no.
Cost impact to us, it's the same cost of that debt.
Difference being though that you are right. It takes the receivables and related debt off balance sheet and that reduction this quarter that impact was $75 million.
Great. Thanks for taking all my questions.
Youre welcome.
Our next.
Question is a follow up some Daniel Moore with CJS Securities. Please proceed with your question.
Thank you again.
As a follow up to that to that last one as it relates to cash flow.
Obviously, the EBITDA guide in the you know $220 million range is still the goal.
How does that translate how do you see that translating to cash flow from ops or free cash flow.
<unk> exclusive of the $75 million receivable.
That you just mentioned just trying to get a sense of your view for cash generation for the year. Thanks.
Sure Dan Yeah. So.
It's interesting this year because when you look at the $220 million adjusted EBITDA number.
Relative to a year ago.
If that's your reference point for four.
Cash flow and the cash flow estimates.
The receivable securitization actually serves to mitigate a couple of things one if you recall, we made a 35 plus million dollar contribution to our pension plan in the first quarter. So that mitigates the impact of some of that on the balance sheet reported debt.
And secondly, as you've been seeing in our cash flow information first quarter of this year and as we've talked about.
We are expecting a higher level of capital expenditures. This year. So I wouldn't use those factors in modeling out the cash flow for the year.
Got it thank you.
Okay.
We have no further questions at this time, Mr. Wilson I would like to turn the floor back over to you for closing comments.
Thank you Christine and thank you for joining us today and your free interested Mathews for additional information about the company and our financial results. Please contact me or visit our website.
The rest of your day.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.