Q4 2023 Matthews International Corp Earnings Call
Greetings and welcome to Matthews International's fourth quarter and year end fiscal 2023 financial results call. At this time all participants are in a listen only mode. A 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.
Please note. This conference is being recorded I will now turn the conference over to Steven Nicola CFO. Thank you you may begin.
Thank you Sherry good morning, I'm, Steve Nicola Chief Financial Officer of Matthews and with me on this call. This morning is Joe BARDA Lacy, our company's president and CEO.
For your reference in today's call. Our earnings release has been posted to the investors section of our website www Dot M. A T. W. Dot com along with the presentation before we start. Please note that any forward looking statements in connection with this discussion are being made pursuant to the safe Harbor provisions of the private <unk>.
<unk> Litigation Reform Act of 1095 factors that could cause the company's results to differ from those discussed today are set forth in the Companys annual report on Form 10-K, and other periodic filings with the SEC.
In addition, we will be discussing non-GAAP financial metrics and encourage you to read our disclosures and reconciliation tables carefully as you consider these metrics in connection with any forward looking statements and non-GAAP financial information. Please read the disclaimer included in today's presentation materials located on our website now.
I will turn the call over to Joe.
Okay. Thank you Steve good morning.
Again this quarter, we are very pleased with our results as the company reported higher consolidated sales, while all of our business segments reported higher adjusted EBITDA.
Our industrial technologies business again reported solid revenue growth in the fourth quarter, driven by the strong and ongoing interest in our energy solutions business. This growth enabled the segment to exceed $500 million revenue target, we set for the year industrial technologies revenue for the full year increased by over 50% in fiscal 'twenty three.
From last year's sales of $335 million.
Our Memorialization business also performed well for the full year with stable revenue. Despite the continued decline in that.
Our sharp focus on improving productivity in the business coupled with improved price realization led to an 8% increase in adjusted EBITDA for the full year.
And that's G. K as expected cost reduction actions have resulted in higher adjusted EBITDA for the quarter and improve margins despite market conditions in Europe, that's still continued to be challenging.
Based on the strength of our operating results, we exceeded our target we reduced our net leverage ratio and also lowered our total debt outstanding as of year end.
We expect further debt reduction in the coming year as we convert our increased working capital results from our growing industrial technology segment to cash.
Consolidated sales for the company increased by six 7% and adjusted EBITDA by 7% in fiscal 2023.
Impressive results despite the sense in the sense of uncertainty hovering around the global markets fueled by geopolitical events and the interest rate concerns. We are poised to drive continued growth in sales and adjusted EBITDA in fiscal 'twenty to 'twenty four buoyed by the long term opportunities being created by several of our businesses with special mention joined.
That's real technology segment.
On a constant currency basis compared to prior year, our sales increased 8% and our EBITDA increased 9% with strong performance in a challenging environment.
Turning now to the performance of our individual businesses, let's begin with industrial technologies, which had a which had strong growth in fiscal 2023, primarily through higher sales and our energy storage solutions business.
Included in the year over year improvement are also benefits gained from the acquisitions of old break in the rns automotive that provided expanded capacity to execute and meet our growing demand for energy solutions.
On our last call we discussed the actions to be taken it all broken rns that would ultimately improve their overall performance as you can see from our strong fourth quarter results those initiatives have begun.
Significant improvement in the operating results of these businesses in the coming year.
Continuing to actively engage in multiple discussions with several Oems and battery manufacturers across the world are introduced solutions services, and we expect to finalize orders for production scale equipment during 2024.
We still have about 50% of the $200 million in end of Yours announced this past January that we expect to fulfill during 'twenty 'twenty four as customer delays have pushed out deliveries.
We will continue to share our progress with any significant new orders as they are received.
We exited in 2023 with backlogs in our engineering and Odebrecht businesses that were $190 million higher than at the beginning of the year, including an increase of $80 million and our energy business.
As for our product identification and warehouse automation businesses, let me lead off with an update on developments at our product and our product identification business.
As you know this business provides a comprehensive suite of advanced marketing and printing technologies consumables and software for industrial type applications.
Actions include differentiated printing equipment recurrent eight.
Eight consumables and critical control the software.
As you May recall, we identified an opportunity to displace incumbents continuous.
Yes.
<unk> technology, which has proven to be too complex environmentally chubs and costly or new solution addresses a market opportunity of about $2 billion using a disposable printed it is maintenance free and reduces total cost of ownership significantly.
The solution parents flexibility speed and performance with low maintenance convenient and environmental friendliness.
We continue to develop the economic and performance models supporting their product and believe it could be only available product in the market able to address the growing need for two D codes that are delivered at high rates of speed.
The codes are expected to replace barco's in certain applications due to their ability to deliver greater track and trace information and we believe our product is perfectly positioned to meet this demand.
Anticipate launching this loosen sometime in the latter half of 'twenty 'twenty four to early 2025.
With respect to warehouse automation, we want our first European warehouse automation installation project and our first factory automation order, which will be delivered in fiscal 2024. We are excited about the opportunity to expand our available market both by industry and geography.
Fueled by the continued growth of our industrial technology segment, we are exploring ways to expand our product portfolio. In this segment through acquisitions, which will augment our ability to grow each of the businesses with capacity geography and technology.
As I've said before our Memorialization segment has been reset to a higher level than before the pandemic.
While fiscal year revenues for the business remains stable, we delivered an adjusted EBITDA number that exceed the amount reported for the full fiscal year before the pandemic by $30 million.
Continued growth of our cremation products business. In addition to market share gains productivity improvements acquisitions and pricing initiatives all contributed to this success.
Moving on to ask G. K. This segment continues to be impacted by challenging market environment in Europe and unfavorable currency rate changes.
That said, we didn't see performance studying over the second half of fiscal 2023 and are also beginning to see the impact of cost reduction actions implemented recently as margins and adjusted EBITDA improved in all of the regions in which we operate we are also initiating a more significant cost reduction effort in Europe, which has been the most.
Early challenge region for S. G K.
These actions include selective price increases and the closing of several sites, thus, reducing our cost structure in Europe due to the impact of the current war between Russia and Ukraine.
Looking ahead to next year, we are excited about the long term opportunity for all of our businesses, but especially for our industrial technology segment.
We believe it can drive us to another year of both sales and adjusted EBITDA.
We met our targets for the year and we are well positioned for a solid start in fiscal 'twenty four with good backlogs that in in that business in particular however.
As I advised on prior calls there was a significant amount of project related work in our industrial technologies segment, specifically in engineered solutions overt and warehouse automation.
As the as these businesses continue to scale up and account for a greater portion of our consolidated sales it becomes more difficult to project timing of our growth.
On a quarterly basis.
With this in mind, we will not provide specific fiscal 'twenty four earnings guidance at this time, but I can say that we expect our climbed 24 results to exceed fiscal 2020 three.
Note that we anticipate providing updated guidance as we have more clarity on the timing of orders as they come through.
As well as for our capital allocation plans.
We anticipate fiscal 2024 operating cash flow generation to be strong.
Continued debt reduction remains a long term focus and as I mentioned earlier, we plan to explore acquisitions to support growth, particularly in our industrial technologies segment.
Closing, we look forward to delivering another good year in 2024, as we continue to transfer the transformation of our industrial technologies segment into a more significant contributor to our overall results.
Now, let me turn it over to Steve who will discuss the financial results for the quarter and the fiscal year in greater detail.
Thank you Joe I'll begin with slide seven consolidated sales for the fiscal 2023 fourth quarter were $480 million compared to $457 million, a year ago, representing an increase of $23 million or 5% the.
The increase primarily reflected higher sales for the industrial technology segment. The industrial technology segment reported a sales increase of $36 million or 34% compared to a year ago, primarily reflecting higher engineering energy storage sales and the impact of the acquisitions of Odebrecht G. M B H.
Rns automotive G M D H in August last year.
Memorials nation segment sales were $204 $9 million for the current quarter, which was relatively consistent compared with $206 $3 million a year ago.
And sales for the S. G. K brand solutions segment were $11 $5 million lower than a year ago.
On a consolidated basis changes in currency rates had a favorable impact of $5 million on current quarter sales compared to a year ago.
On a GAAP basis, the Companys net income was $17 $7 million or 56 cents per share for the current quarter compared to a loss of $81 million or $2 63 per share for the same quarter last year. The prior year loss on a GAAP basis reflected a goodwill impairment charge related to the S. G.
<unk> brand solutions segment.
On a non-GAAP basis consolidated adjusted EBITDA, which represents net income before interest expense income taxes, depreciation and amortization and other adjustments.
For the fiscal 2023 fourth quarter was $61 $9 million compared to $55 $9 million, a year ago, representing an increase of $6 million or 10, 7%.
The increase reflected higher adjusted EBITDA for all three of the company's reporting segments.
<unk> in currency rates had a favorable impact of approximately $422000 on a current quarter consolidated adjusted EBITDA compared to a year ago.
Adjusted earnings per share for the current quarter was 96 cents compared to 82 cents for the same quarter a year ago, representing an increase of 14 or 17, 1% increase.
The increase primarily reflected higher adjusted EBITDA for each of our business segments and a lower income tax expense impact for the current quarter offset partially by higher interest expense.
Please see the reconciliations of adjusted EBITDA non-GAAP adjusted earnings per share and constant currency sales and adjusted EBITDA provided in our earnings release.
Please turn to slide eight to begin a review of our segment results.
Sales for the industrial technology segment for the fiscal 2023 fourth quarter were $146 million compared to $104 $6 million, a year ago, representing an increase of $36 million or 34%.
Recent acquisitions, primarily all brick and rns automotive contributed $14 $8 million to the current quarter growth.
The engineering business reported higher sales for the current quarter compared to a year ago, primarily reflecting continued growth in our energy storage solutions business or.
Our product identification business also reported higher sales for the current quarter compared to last year, which was offset by lower sales for the warehouse automation business for.
For the year sales for the industrial technology segment were $505 $8 million exceeding the $500 million target, we set at the beginning of the fiscal year and $172 million or over 50% higher than last year.
Adjusted EBITDA for the industrial technology segment for the current quarter was $23 $5 million compared to $23 $4 million a year ago. The increase primarily reflected the benefit of the segment sales growth for the current quarter offset partially by the unfavorable impact of recent acquisitions.
As we previously indicated these acquisitions were not expected to contribute to adjusted EBITDA immediately but their results are expected to improve with our integration actions. We are already starting to realize the benefits of these actions. Please.
Please turn to slide nine.
Sales for the Memorial Ovation segment for the fiscal 2023 fourth quarter were $204 $9 million compared to $206 $3 million for the same quarter a year ago. The recent quarter, primarily reflected the benefits of improved pricing and the acquisition of Eagle granted company in February 2023.
Which were offset by lower unit sales of caskets and memorial, reflecting lower COVID-19 related deaths.
Memorialized nation segment adjusted EBITDA for their current quarter was $36 $9 million compared to $33 $4 million for the fourth fiscal quarter last year.
The increase primarily resulted from improved pricing and benefits from operational cost savings initiatives. These increases were partially offset by the impact of lower caskets and memorial sales volumes and increased labor costs.
Please turn to slide 10.
The SDK brand solutions segment reported sales of $134 $7 million for the fiscal 2023 fourth quarter compared to $146 $3 million a year ago.
The decrease primarily reflected lower sales in the segment's European and U S markets, including a decline in retail based sales and the impact of several site closures.
Changes in currency rates had a favorable impact of $1 $8 million on current quarter sales compared to a year ago.
Adjusted EBITDA for the S. G. K brand solutions segment was $17 $5 million for the recent quarter compared to $16 $7 million a year ago. Despite lower sales adjusted EBITDA for the segment increased for the current quarter, primarily reflecting improvements in the ability to pass along cost increases.
<unk> and the benefits from the segment's recent cost reduction actions.
<unk> in currency rates had an unfavorable impact of $235000 on adjusted EBITDA compared to a year ago.
Please turn to slide 11.
For the year ended September 32023, operating cash flow was $79 $5 million compared to $126 $9 million a year ago. So a reduction from last year, primarily resulted from an increase in working capital during fiscal 2023.
Working capital and our energy storage solutions business was higher than a year ago, reflecting the significant growth in this business granted inventories also increased for the year, reflecting higher sales and increased costs.
Operating cash flow for the 2023 and 2022 fiscal years reflected final payouts for the settlement of the company's U S retirement plan obligations. The final payouts for settlement of the supplemental plans totaled $24 $2 million in the fiscal 2023 first quarter <unk>.
Payouts for settlement of the company's principal U S pension plan totaled $35 $7 million in the first fiscal quarter last year.
Outstanding debt was $790 million at September 32023, compared to $799 million at the end of fiscal 2022.
At September 32023, the company's leverage ratio based on net debt, which represents outstanding debt less cash and trailing 12 months. Adjusted EBITDA was 331, representing a reduction from 335 at June 32023, and three five.
At September 32022.
Approximately 35 million shares were outstanding as of September 32023 during the fiscal 2023 fourth quarter. The company purchased approximately 1100 shares which were in connection with withholding tax obligations on equity compensation.
At September 32023, the company had remaining authorization of approximately $1 2 million shares under its repurchase program.
Finally, the board this week increased the quarterly dividend to <unk> 24 per share on the company's common stock representing the 30th consecutive annual dividend increase since becoming a public publicly traded company the.
The dividend is payable December 11, 2023 to stockholders of record November 27 2023.
This concludes the financial review and we will now open the call to questions.
Sherry.
Thank you Yeah. If you would like to ask a question. Please press star one on your telephone keypad.
Tom will indicate your line is in the question queue you.
You May press star two if he 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 sorry one.
One moment, while we poll for questions.
Our first question is from Daniel Moore with CJS Securities. Please proceed.
Thank you good morning, Joe morning, Steve.
Good morning, Good morning, Dan.
Start with energy storage, obviously, a big influx of orders last fiscal Q1 and I. Appreciate the color Joe just talk about pipeline you know what it looks like.
And what your expectations for order intake would look like over the next maybe four quarters.
They're getting the exact timing is difficult, but what are you. What are you hearing from both your bigger customers and newer opportunities.
So our largest customer has pushed out and that's a more more issues as it relates to to them than it is as it is relates to US you can see by the working capital build that we have on our balance sheet is more of a question of timing of deliveries and hitting the milestones that will allow us to reduce that while there be.
Being ready for the equipment is in the.
The critical issue.
There. They obviously we are aware of other projects that they are working on I know they are substantially behind in those developments, but they we expect to hear something over the course of this year others. However are moving forward.
As I've said before we.
Stand today with respect because our largest customer or other customers are probably two to three years.
So what we will expect to see this year or the first orders for production equipment and I would say we have at least two maybe three significant customers that we'll be we're in the midst of working on what we call specifications for those production pieces of equipment.
But they will not be a multi $100 million orders at this time, they will lead to multi hundred million dollar orders overtime, but today.
The board and we're talking about are more in the line of $25 million to $50 million and we will we will announce those as they go forward. We're also working on some very interesting things with some U S manufacturers on joint developments in the United States. So we'll see we'll have some announcements.
Sure over the coming months.
But at this point in time timing of that is our biggest issue.
Yeah.
Really helpful. Joe.
I'm I'm bouncing around a little bit here, but in memorial is nation.
The initial bump in cask itself from the pandemic followed by delayed bumping memorial.
You know me now until he fully passed those are more difficult comps and what should sort of the organic rate look like in your mind over the next three to five years.
Yeah, I would tell you that when it comes to Memorial day, and the team has done an exceptional job.
Well, what I would call catskinner deaths for the death rates are down materially.
From the from the peaks still had a few of those kind of off off a little off normal kind of months throughout that period, but I would tell you we're substantially back I.
Well, if I as I look forward I think the key to this story as it relates to memorials nation as we've picked up some share.
We picked up some pricing and we've improved our productivity and the last part of the we've made several smaller acquisitions that have become extremely accretive.
To that overall business and we have some strategies that we're looking at which we hope will continue to.
To build on that so I again I don't think this is a business that's going to grow double digit top lines or double digit bottom line into the future, but we expect it to be a modest ROE we're going into the future over the next five years.
Helpful, One more and I'll jump back.
Cash flow and capital allocation, maybe Steve what are we looking at for Capex for next year, if I missed it forgive me how much do you think we can pull out of working capital.
And Joe I heard the acquisition a couple of times just talk about the.
Priorities.
Levering versus you know, maybe maybe some debt some of that M&A and what what kind of size, we might be looking at thanks again.
Yes, so Dan I'll say I'll start.
Yeah, I'll start I'll start with the first part of your question so with.
With Capex I think this year we landed.
Just a little bit over $50 million for the year I do expect that to be a little bit higher next year. So.
Just with some of the investments that we're making in our industrial technology segment, I expect that that to be higher and then with respect to working capital. Although I think he heard Joe referenced a strong cash flow that we're expecting a strong cash flow year and next year and I do think of.
An important piece of that is going to come from.
Working capital reduction we had to build this year that we just talked about I expect that I expect that to be realized to some degree in fiscal 2024, but again the caution there is timing on that Dan just simply because of the project nature of the business.
Yeah, Dan and I'll take the second half of your question as it relates to acquisition Youre right I would I have been very consistent with a couple of comments with respect to acquisitions, Let's let me put it by by segment. This is a better way to do it we would expect to do a few things in our on our memorials Asian business, but those are relatively small.
With big impacts potential so the bottom line, that's leveraging our what we're doing really is leveraging our platform sales, but across the United States distribution centers across the United States and as we're in this cemeteries and funeral homes in literally every part of the country. So we will continue to extend that.
Those are relatively small.
What I think is that what is important to hear in his commentary.
We're now focused on it.
Growing our industrial technologies segment as a whole there are a couple of pieces of that puzzle.
Working on.
I'm not prepared today to kind of speak to them, but they're not insignificant acquisitions are one of the keys to the fact that we know based on what the working capital build in but we expect to collect this year, we're going to have a pretty significant.
Difference in working capital over the course of the year the timing of that really is.
Not so much in our control because they've got to be willing to accept delivery Oh, just just for purposes of those on the phone. Our revenue recognition is not necessarily the same as the timing of collections and billings. There is revenue recognition is done as work is performed versus billings and <unk>.
Collections are based on the milestones and the contracts that are usually set around delivery timetables. So we know that's coming and we expect that to be a fairly significant contributor to the overall, we will pay down debt.
As well as do some acquisitions in the process. So we're pretty we're working on some things hopefully some of them come to fruition not prepared to talk about what they are.
Alright, I'll come back with any follow ups. Thank you.
Yeah.
Our next question is from Liam Burke with B Riley.
Please proceed.
Thank you and good morning, Joe Good morning, Steve.
Good morning.
Joe on industrial technologies, specifically energy, you talked about $190 million in backlog.
Okay.
That's that's for <unk>.
Energy.
No no hold on Liam just to be clear that the $190 million increase over prior year between <unk> and energy of which $80 million of that we're getting.
Okay.
What is the cadence.
Shorter cycle orders are you, having a lot of activity on <unk>.
Research level types of cellular.
We're receiving orders every day.
Some larger not the materiality that we would call them out, but as evidenced by the fact that our.
Overall backlog between Obertan energy, which is blended because of how they manage is about 300 over $330 million today.
We're getting orders all the time, so it's just we called out the magnitude of.
The $200 million so order in early calendar 'twenty three because of its magnitude, but we continue to receive orders as we speak.
Thanks, Joe and on.
Memorial is Asian.
The readjustment.
Readjustment of mortality rates, how did cremation due during the quarter.
Oh, our business for cremation rates.
The business.
The business did fine, but we had some early challenges we stand alone.
In the U K principally else minutes works, but we are in the midst of landing one to two more decent sized incineration project here in the U K, which should be added nicely to the performance for the overall group are starting here I would say second half of our fiscal 'twenty four.
Thank you Joe.
Yep.
Our next question is from Justin Bergner with Gabelli funds. Please proceed.
Good morning, Joe Good morning, Steve.
Good morning, Justin.
Morning.
Okay.
I guess could you talk a bit about warehouse automation and how that performed.
In the fourth quarter, and how you see that performing over the course of.
Fiscal year 2024.
So warehouse automation in the fourth quarter had a decent quarter I would not say it was a strong quarter, but what what what was very positive for us in the fourth quarter was the mix of our what I would call it mix of revenue.
Reported fourth quarter contained a lot of pure software and as you know.
Software has better margins than some of the hardware that we sell associated with that.
And so I would say that finished up.
At quarter end the year well.
We as we said throughout the last three to six months, we've seen a slowly and it's not just US. It's also others we.
We will know more about.
Where that business well.
We'll finish off the year, probably after the holiday what we're seeing is a lot of customers, taking a wait and see how Christmas goes attitude.
So we are quoting and we have other things of that activity going on but finalization of orders are going to be are cautious right now and I think that's economic economically sensitive today.
Okay. Thank you that's helpful.
Switching to the M&A.
With respect to M&A I didn't catch how you saw the size of potential acquisitions on the industrial technology side, and what would you say distinguishes between nice to have and need to have assets.
Even a healthy leverage financial leverage ratio at the company and the high interest rate environment. We're in.
I'll give you I'll give you some examples of what we're looking at how we're looking at we know that our software business is the linchpin.
To.
Have you automated warehouse and there's a lot of activity in the marketplace today to be able to expand that portfolio. One of the things. We're looking at for example at system integrators that allow us to integrate directly into the WNS or the ERP systems. These are businesses or allow us more access.
Are two markets that were currently not performing so bringing with the law secondly.
I mean, as a practical matter Joplin, everything, but a nice to have but we have a we have a complete portfolio, but we would love to have more presence in Europe.
And there are some small opportunities over there to allow us to expand.
What we do on the warehouse side in Europe. When it comes to energy I wouldn't say, there's nothing that's necessarily a must have a there's a lot of nice to have but they are extremely complementary as we move forward. So we.
We will be very very sensitive to our leverage ratio, but given the kind of cash flow that we have.
We expect over the course of the year, we should be able to do both.
Great. Thank you so much.
Our next question is a follow up from Daniel Moore with CJS Securities. Please proceed.
Yeah, just wanted to drill down a little bit more Joe you mentioned that the new printhead solution, maybe more today than it's been over the last few quarters. So what's changed.
Oh.
And this is where we are if it's still beta.
No.
Customers pulling you know youre seeing more demand customers pulling or is it your capabilities with what's getting you more excited right now.
The most exciting part of that is we continue to refine what I bought both the economic model and customer desire through discussions.
When we open when we open the kimono, a little bit through our customers and let them see whats coming.
They're they're they're excitement is what's driving our enthusiasm where we stand from a timing standpoint, it's right on where we've kind of said the end of this fiscal year end of this calendar year early next year with months months are not things that we can vote completely but where we're extremely bullish on this sector.
Dan.
We've hired a few folks who spoke with you folks about what we call alternative uses and we think we have something that is unique and I mean, when I say alternative uses I'm not suggesting that we're going to go off into.
Other areas that have nothing to do with what we do well, we got enough different kinds of businesses in our portfolio today, but we clearly can license or produce and sell the chip to alternative uses and gives us a great opportunity long term to monetize what we think is a very very unique solution.
Okay, and lastly, again when you talk about M&A on the software side are these kind of 20 to 50 million dollar deals or could it be something more like that.
Up into the 100.
Because the obviously can be very powerful, but also tend to be dilutive relative to your.
The current margin structure.
Yeah, I mean from a margin standpoint have been pushing up into the hundreds.
Bring them pretty good margins.
I wouldn't be as much concerned about the margins we are sensitive to our debt ratio. So our.
Our ability to do the size will be dependent on where our cash flows are coming in.
We are focused on getting ourselves to under three and we will continue to be focused.
There's a few things out there that we are aware of and we'll we'll make the right call at the same time there are a couple other in the twenty's or a couple of them pushing 70 80.
What they will do though.
Our focus is in trying to make our industrial technologies segment, a more significant part of our overall portfolio.
Thank you.
Yeah.
There are no more questions at this time I would like to turn the conference back over for closing comments alright. Thank you Sherry and thank you all for joining us today and you're interested Matthews.
Just a reminder for additional information about the company and our financial results.
Can feel free to contact me or visit our website enjoy the rest of your day.
Thank you. This will conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.