Q1 2025 Matthews International Corp Earnings Call
Greetings and welcome to the Matthews International first quarter fiscal 2025 financial results Conference call.
At this time all participants are in a listen only mode.
A brief question and answer session will follow the formal presentation.
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Speaker Change: It is now my pleasure to introduce your host Steve Nicola Chief Financial Officer. Thank you Sir you may begin.
Speaker Change: Thank you Christine and good morning, I'm, Steve Nicola Chief Financial Officer of Matthews and with me today is Joe BARDA Lacy, our company's President and Chief Executive Officer.
Speaker Change: Before we start I would like to remind you that our earnings release was posted on the company's 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 under presentations.
Speaker Change: Any forward looking statements in connection with this discussion are being made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995 factors that could cause the companys results to differ from those discussed today are set forth in the company's annual report on Form 10-K, and other public filings with the SEC.
Speaker Change: In addition, we will be discussing non-GAAP financial metrics and encourage you to read our disclosures and reconciliation tables as you consider these metrics.
Speaker Change: 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.
Joe: Now I will turn the call over to Joe.
Joe: Thank you Steve good morning.
Joe: To start our discussion today.
Joe: I wanted to provide some color around an important development related to the company's energy business from earlier this week.
Joe: On Wednesday, and arbitrator in a proceeding that we initiated against Tesla over one year ago issued a ruling in which the arbitrator acknowledged our company's long history extensive research and development and growing patent portfolio and advanced dry battery electrode technology and confirmed our <unk>.
Joe: Right to continue marketing offering and selling that technology to others.
Joe: This ruling effectively clarifies our rights in this groundbreaking technology and reestablish as what we've been saying for years.
Joe: We have valuable solutions founded on the extensive knowhow and intellectual property to support the advancement of dry battery electrode technology, and we have the right to sell it to others.
Joe: After exhausting amicable efforts to negotiate a resolution with Tesla.
Joe: Matthews was forced to file for a declaratory judgment and a binding arbitration seeking clarification of Matthews rights to continue selling our innovative D. B E solutions to others.
Joe: Tesla ignored the contractual obligation to arbitrate confidentially and instead initiated litigation in Federal Court long after we filed our arbitration.
Joe: [noise], alleging matthews had stolen trade secrets.
Tassos retaliatory lawsuit coupled with numerous other threats and action has impaired our ability to work with others in the provision of DB solution and as a result as harmed our business.
Joe: During the past 18 months, we do the fleet adhering to the terms of the parties arbitration agreement, which necessarily prevented us from fully disclosing what was transpiring behind the scenes.
Joe: But given tesla's public filing of the trade secret suite and our obligations under Federal Securities Law, we are required to share this news with our shareholders and customers.
Joe: As I've said numerous times, we have been working in the battery space for over a decade and have independently developed significant intellectual property, including a recently issued foundational patent in the United States that further confirms our development of this groundbreaking technology and our rights to continue developing and selling it.
Joe: Pursuant to the arbitrators ruling we now intend to resume vigorously promoting our DB solutions.
Joe: Given the ongoing confidentiality considerations I remain limited in what I can be can what can be discussed at this time.
Joe: Moving onto other exciting news I'll now share some details on our recent announcement of the sale of SDK brand solutions.
Joe: On January eight we announced the sale of SDK to a newly formed entity created with S. G M Coe, which will combine the two businesses.
Joe: We believe that the deal creates a world class provider of brand solutions, which should be a highly attractive asset once integration is completed.
Joe: The transaction will create an entity, which begin with almost $100 million of EBITDA, but is expected to generate $50 million of synergies over the next 24 to 30 months.
Joe: In addition to the synergies created within the combined entities the transactions substantially improved Matthews operating structure and advances our business strategy for the following reasons.
Joe: One the deal significantly simplifies, our operating and corporate structure, thereby allowing us to focus on higher growth and higher margin businesses. We.
Joe: We expect that post transition services, which we will provide for the new entity, our corporate function can be simplified and reduced by up to a further $15 million.
Joe: To the.
Joe: The transaction has structures enables us to realize significant value for the brand solutions segment at an attractive multiple for an asset which was generally considered dilutive by the market to the overall valuation of Matthews.
Joe: We received a multiple of 10 times for our 60% of S. G. K that was transferred to the new entity.
Joe: Significantly higher than anyone in the market had anticipated and about equal to the estimated value all of SDK.
Joe: Three proceeds from the transaction will be immediately applied to debt reduction pursuant to our stated objectives. As a result, our net leverage will improve from about $3 nine today pre transaction to less than three post transaction, which will decline further when we refinance the new entity and cash.
Joe: Our $50 million of preferred instruments.
Joe: Four.
Joe: We retain significant upside of the new entity, which we believe upon exit will be a much stronger business than it is now.
Joe: We also retained several significant.
Joe: S. G K related assets are German roto gravure business.
Joe: A critical software investment valued at over $20 million today.
Joe: We expect to exit these investments in the near future as we see the opportunity.
Arise.
Joe: We can provide additional details of the deal during Q&A, but let me first provide you with some background behind our discussions with SGS and it's important for you to understand how committed we have been to the idea of optimizing the full value of our asset portfolio.
Joe: We had been working on a deal with Ses and its previous owners since 2019.
Joe: Those discussions included various private equity firms that own <unk> during the last five years and other entities, including a minority business entity or M. B E.
Joe: We're close to an agreement on the deal in 2020 with the PE firm that then one sds, but the COVID-19 pandemic and the market pressures that are created by the restructuring of the STS ownership.
Joe: As the world slowly began to recover we again initiated discussions with SCS and the new P owner P E owner in 2021.
Joe: But then the Ukraine crisis in <unk>.
Joe: In early 2022, resulting in a significant hit to commercial productivity in Europe for both businesses and resulted in yet another restructuring of the ownership of SGS.
Joe: In 2023, we initiated sales discussions with an M. B a outlining a structure whereby matthews would retain a portion of a new entity to be created through the acquisition and the M. B would be the majority owning owner, allowing it to use its minority business status to generate business for the consumer goods from the consumer.
Joe: Or goods companies from which we would benefit from as a minority owner.
Joe: However, the M. B he chose another acquisition alternatives.
Joe: We then reengage with the current owners of SCS in 2021 'twenty 'twenty, four which led us to the current deal structure.
Joe: This was a complex transaction that required significant time to evaluate negotiate execute and announce.
It is also a highly accretive transaction that has preserved the true value of <unk>.
Joe: S G K for our shareholders.
Joe: Why is the multiple that we received we achieved so attractive much more than most had anticipated because even though matthews as a minority owner in the deal S. G is integrating into S. G Kase platform.
Joe: That form in which we have invested a platform that has generated over $1 billion in adjusted EBITDA since its acquisition in 2014 and it platform that played a significant role in returning capital to our shareholders during that time period.
Joe: Although we will not be running the new entity. The investments we made an SDK drove this deal and will ultimately result in significant value creation for our shareholders in fact.
Joe: One analyst note on the deal stated that we could generate a total consideration of close to 702.
Joe: $750 million, which would be almost equal to our market cap prior to the announcement of the deal.
Joe: We are awaiting approval from the Federal Trade Commission and expect the deal to close in the first half of this calendar year.
Joe: As we work towards closing this deal it's useful to look back on what has what has been created through our commitment to optimizing the value of our portfolio.
Joe: Over the last 10 years and despite the challenges posed by global pandemic and geopolitical events and regulatory challenges Arkansas.
Joe: Our consolidated sales have grown 62%.
Joe: During that time, I'm memorialize Asian business has evolved into an industry leader.
Joe: Our energy business has unlocked significant opportunities to create value that has not yet been fully appreciated by the market.
Joe: And our warehouse automation and product identification businesses have found promising opportunities and innovative segments.
Joe: We will continue to focus on driving growth at these emerging businesses, which will ultimately forced us to evaluate the portfolio at an opportune time.
Joe: Finally <unk>.
Joe: Turning to our upcoming annual shareholders meeting in the contested proxy proxy.
Joe: I ask you to realize that actions speak louder than words.
Joe: In the last 30 days this management team together with our full support of the board of directors have disclosed two significant events that have been in the works for several years, but due to the confidentiality requirements, we have been unable to disclose.
Joe: Both transactions required patients and a clear understanding by the board of directors of the value creation opportunity to be achieved upon success.
Joe: In the U K transaction, we will realize hundreds of millions of dollars more than the market and Barrington expected. Thanks to the patients of the board of directors.
Joe: In the Tesla arbitration, the management and the board of Directors had the will to initiate an action against one of the largest companies of the world to protect our rights to our highly valuable and proprietary <unk> technology.
Joe: Both situations demonstrates the importance of having knowledgeable directors, who understand the value and complexity of our diverse businesses and how true long term value can be created and protected when long term strategic plans are thoughtfully and patiently developed.
Joe: Oh.
This value proposition is in Stark contrast to the position of our activist Investor Barrington capital, whose perspective in short term is short term and who remarkably still knows very little about our businesses.
Joe: Indeed, our long term shareholders stand to benefit from the knowledge embedded within our directors, especially as we continue our evaluation of strategic alternatives now after the developments from earlier this week.
Joe: I ask you to vote for our current slate of directors, especially given our recent announcements.
Joe: Lastly, with respect to our outlook for the year, we are maintaining our guidance for adjusted EBITDA in the range of $205 million to $215 million. This of course is dependent on the timing of the closing of the SDK transaction, which we will keep you informed of.
Steve Nicola: Now I'll turn it over to Steve to talk about the results for the court.
Steve Nicola: Thank you Joe for the financial review, let's begin with slide seven.
Steve Nicola: For the fiscal 2025 first quarter the company reported a net loss of $3 5 million or <unk> 11 per share compared to a net loss of $2 $3 million or seven cents per share a year ago.
Steve Nicola: On a non-GAAP adjusted basis net income attributable to the company for the current quarter was $4 $3 million or 14 per share compared to $11 3 million or <unk> 37 per share last year.
Speaker Change: The decline primarily reflected the impacts of lower adjusted EBITDA, which I will discuss in a few minutes and higher interest expense for the current quarter.
Speaker Change: Consolidated sales for the fiscal 2025 first quarter were $401.8 million compared to $450 million a year ago.
The decline primarily reflected lower sales for the industrial technology segment, mainly reflecting lower engineering sales.
Speaker Change: Additionally, sales for the Memorial Ization segment declined for the current quarter compared to a year ago, primarily due to lower unit volumes.
Speaker Change: Estimated U S casket of deaths declined from the same quarter a year ago.
Speaker Change: Sales for the S. G. K brand solutions segment were modestly higher than the first quarter last year, which is continuing to benefit from more stable market conditions.
Speaker Change: Consolidated adjusted EBITDA for the fiscal 2025 first quarter was $40 million compared to $45 $5 million a year ago. The decrease primarily reflected a decline in the industrial technology segment.
Speaker Change: Adjusted EBITDA for the Memorial as Asian, and S. G. K branch solution segments remained relatively steady compared to last year.
Speaker Change: In addition, corporate and other nonoperating costs were lower than a year ago, partly reflecting the company's ongoing cost reduction efforts.
Speaker Change: Please see the reconciliations of adjusted EBITDA and non-GAAP adjusted earnings per share provided in our earnings release.
Speaker Change: Please move to slide eight to review our segment results.
Sales for the Memorial <unk> segment for the fiscal 2025 first quarter were $195 million compared to $208 $1 million for the same quarter a year ago.
Speaker Change: The decrease primarily reflected lower granite memorial sales and the decline in casket unit volumes.
Speaker Change: Granted sales were higher last year as in addition to regular volume the business was working down backlogs, which had built up during the pandemic.
Speaker Change: The unit volume declines for caskets, primarily reflected lower U S. Caskets deaths bronze memorial sales were also lower for the quarter.
Speaker Change: In addition memorial <unk> sales for the current quarter were unfavorably impacted by the disposal of the company's unprofitable European cremation and incineration equipment operations.
Speaker Change: These decreases were partially offset by higher price realization and incremental sales from the acquisition of a casket distributor in January 2024.
Speaker Change: Memorial <unk> segment adjusted EBITDA for the current quarter was $36 $6 million, which was relatively unchanged from $36 $7 million a year ago.
Speaker Change: The unfavorable impact of the decline in sales was partially offset by the elimination of losses in the European cremation and incineration equipment operations as a result of the disposal of the business.
Speaker Change: In addition benefits from cost savings initiatives and improved pricing also contributed to the current quarter, which were partially offset by higher U S health care costs.
Speaker Change: Please move to slide nine sale.
Speaker Change: Sales for the industrial technology segment for the fiscal 2025 first quarter were $85 million compared to $111 $4 million a year ago.
Speaker Change: Engineering business reported significantly lower sales for the current quarter compared to a year ago.
Speaker Change: Primarily reflecting the slowdown in the Tesla project and the impact of the litigation on work with other customers.
Speaker Change: Sales for the warehouse for the warehouse automation business were also lower for the quarter.
Speaker Change: In addition sales for the current quarter were unfavorably impacted by the closure of the unprofitable European automotive business that was acquired in connection with the <unk> transaction a few years ago.
Speaker Change: The product identification business reported modestly higher sales compared to last year.
Speaker Change: Adjusted EBITDA for the industrial technology segment for the current quarter was $1 $8 million compared to $9 $6 million a year ago. The decrease primarily reflected the impact of lower sales for the engineering business.
Speaker Change: The adjusted EBITDA decline also reflected the impact of lower warehouse automation sales.
Speaker Change: The declines were partially offset by higher sales and adjusted EBITDA for the product identification business lower bad debt and bonus expenses and benefits from recent cost reduction actions in Germany.
Speaker Change: Please move to slide 10.
Speaker Change: The SDK brand solutions segment reported sales of $138 million for the quarter ended December 31, 2024, compared to $135 million a year ago, representing an increase of $282000.
Speaker Change: The increase primarily reflected improved pricing to mitigate the impacts of inflationary cost increases and higher sales for our private label business, our European cylinder business and in the Asia Pacific brand market.
Speaker Change: These increases were partially offset by a decline in brand experienced sales and lower sales in the segment's European brand markets.
Speaker Change: Currency rate changes had an unfavorable impact of $700000 on current quarter sales compared to a year ago.
Speaker Change: Adjusted EBITDA for the S. G. K brand solutions segment was $12 $3 million for the current quarter compared to $12 $9 million a year ago. The decrease primarily reflected higher wages and benefits for the current quarter, including increased U S. Healthcare costs. These increases were substantially mitigated by the.
Speaker Change: Bits of improved pricing to mitigate inflationary cost increases and the segment's recent cost reduction actions.
Speaker Change: Please move to slide 11.
Speaker Change: Cash flow utilized in operating activities for the fiscal 2025 first quarter was $25 million compared to $27 $3 million a year ago.
Speaker Change: Our first fiscal quarter is typically our slowest generally reflecting a net operating cash outflow due primarily to seasonally lower earnings and the payment of year end accruals taxes and insurance and other annual payment items there.
Speaker Change: The current quarter also reflected payments in connection with litigation costs and upfront costs related to our cost reduction actions, which were partially offset by proceeds from asset sales.
Speaker Change: Outstanding debt was $809 million at December 31, 2024, compared to 776 million at the end of September representing an increase of $32 $7 million during the fiscal 2025 first quarter.
Speaker Change: The company's net debt, which represents outstanding debt less cash was $776 million at the end of the current quarter.
Speaker Change: At December 31, 2024, the company's net debt leverage ratio was 388, which is based on net debt and trailing 12 months adjusted EBITDA.
Speaker Change: The company's first fiscal quarter is generally the slowest cash flow quarter and similar to prior years, we expect cash flow and our net leverage ratio to improve over the remainder of the fiscal year.
Speaker Change: In addition, the $250 million cash proceeds from the S. T K transaction, which is expected to close mid 2025 will be a substantially applied to debt reduction upon receipt.
Speaker Change: For the fiscal 2025 first quarter the company purchased approximately 171000 shares under its stock repurchase program.
Speaker Change: These purchases were solely related to withholding taxes on equity compensation vesting, we remain primarily focused on debt reduction.
Speaker Change: There were approximately 31 million shares outstanding at December 31, 2024.
Speaker Change: As we disclosed last quarter, we recently initiated cost reduction programs that span several of our business units and corporate functions. These programs are expected to result in annual consolidated savings up to $50 million and to date, we are on track to achieve and potentially exceed this target.
Speaker Change: The most significant portions of the estimated savings will be from our engineering and tolling operations in Europe, and our general and administrative costs.
Speaker Change: Finally, the board declared last week, a quarterly dividend of 25 cents per share on the company's common stock. The dividend is payable February 24, 2025 to stockholders of record February 10 2025.
Speaker Change: This concludes the financial review and we will now open the call to any questions Chris.
Speaker Change: Christine.
Christine: Thank you we will now be conducting a question and answer session.
Speaker Change: If you would like to ask a question. Please press star one on your telephone keypad.
Speaker Change: Well a confirmation tone will indicate your line is in the question queue.
Speaker Change: You May press star two if he would like to remove your question from the queue.
Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the starkey one moment. Please while we poll for questions.
Speaker Change: Thank you. Our first question comes from the line of Liam Burke with B. Riley. Please proceed with your question.
Liam Burke: Thank you good morning, Joe Good morning, Steve.
Speaker Change: Good morning Liam.
Liam Burke:
Liam Burke: Joe could you give us a sense as I.
Speaker Change: No. This is going to be difficult, but you are building momentum in the D. B E technology and sales prior to the test of a lawsuit.
Speaker Change: You have any sense about how quickly you can reestablish momentum either in backlog or sales growth and any kind of general timeframe I mean, as I said in the press release, you're re initiating marketing initiatives immediately.
Speaker Change: Sure I'll be glad to address that first let me address the fact that it was not with just the beginning of the lawsuit.
Speaker Change: Theres been a private dispute for almost two years at this point in time.
Speaker Change: That has slowed our value our marketing efforts out in the marketplace. So that delay has significantly curtailed a lot of other companies development in the marketplace.
Speaker Change: There is no shortage of people that have knocked on our door over the last 18 months or so 20 months or so I expect that they have been doing a lot of work internally without our equipment, but as of today. We believe we're the only people that can provide.
Speaker Change: Proprietary DB solution equipment, we expect that ramp to be slow at first because of the nature of our I would call it automotive EV.
Speaker Change: Production development, but as you saw in the last scale.
Speaker Change: Scale that we had with the Tesla. We went from 20 to 50 to 80 to 120 pretty quickly with 100 with a $200 million order or so for a number of people at that time I expect that as we expand the portfolio of customers, we can expand pretty quickly.
Speaker Change: Okay fair enough, but I mean, this is not a twenty-five about this as a multiyear event right.
Speaker Change: It it's clearly a we expect to have some benefit coming out in the end of 'twenty five but it would be more around the announcements with whom we're working with perhaps and their levels we have.
Speaker Change: We've had lab machines and we've told you. This before we've had lab machines sold for years. So people have been testing and developing their own formulations without our help for many many many years and we expect that to ramp up more quickly so, but I think the key to that.
Liam Burke: Liam is that it'll be multiple customers rather than one and that's what we've been inhibited from doing for the last several years.
Liam Burke: Great and then very quickly you have the new printer platform is that on schedule. We've got we've had a lot of things going on here.
Liam Burke: Where you think we are we are in the midst. We're in the midst of production ramp up as we speak and that'll be in market. This year, we sold interestingly enough. We spoken often about two D coding we landed our first two D code project in Europe.
For consumer products companies to D code is coming folks and our technology is primed to take advantage of that to the code. If you don't know what that is is similar to a scaled down QR code, which will replace many of the barcodes that sit on consumer products getting trained a lot more data and our ability to produce that unlike anybody in.
Liam Burke: The marketplace today is going to be an advantage for us going forward.
Speaker Change: Great. Thank you Joe.
Liam Burke: Yep.
Speaker Change: Our next question comes from the line of Daniel Moore with CJS Securities. Please proceed with your question.
Daniel Moore: Yes. Good morning, Thanks, Joe Thank Steve Memorialize nation typically good morning, Kipp. It typically ebbs and flows. The you know the decline this quarter was a little bit larger than than than typical.
Daniel Moore: What was the impact in granite of kind of working down backlogs last year and you know how would you quantify the impact of exiting the European cremation business.
Daniel Moore: Yeah, Dan so that so the decline in revenues.
Daniel Moore: Was actually more weighted to the granite so I can't give you the I shouldn't give you the specific number but I would tell you it's more weighted to granted volume.
Daniel Moore: But again.
Daniel Moore: The European cremation and incineration business, which was an unprofitable business for US also was a significant attributed as that decline. So those two were.
Daniel Moore: The more significant pieces.
Yeah, and Dan as we as Steve referenced to you. The most of the decline in the granite business had to do with work down backlog post COVID-19.
Daniel Moore: That occurred last year this quarter. So we're back to a steady state volume at the Brown.
Daniel Moore: The granite business as well it was the last of the normalization.
Daniel Moore: Okay. So that was the that going forward that shouldn't be a big headwind for the next several quarters.
Daniel Moore: About around European exit it was.
Daniel Moore: Was there much in it.
Daniel Moore: Remind me of the timing of exiting the European business.
Daniel Moore: We exited the European business in Q4.
Daniel Moore: Last year Okay.
Daniel Moore: Got it.
Daniel Moore: Helpful and then industrial obviously energy storage.
Daniel Moore: Obviously clearly on pause for you know for obvious reasons.
Speaker Change: How much of the $30 million decline in the quarter year on year relates to energy storage. How much is just general softness in warehouse automation marketing products I'm, just trying to get a sense for the trajectory of the you know the other non energy storage businesses and when we expect those to return to growth.
Speaker Change: The warehouse business was a modest part of it the vast majority of the decline.
Speaker Change: Was in our energy business.
Speaker Change: Due to delays that we've referenced before and probably some implication from the.
Speaker Change: The lawsuits that we've been referring to the.
Speaker Change: The warehouse business is seeing great uptick and interest as you might expect as others are seeing it as well. So we're expecting going forward to have a pretty good recovery in that business.
Speaker Change: It is a lumpier business when it comes to investments in warehouses and that business is seeing that opportunity grows. So on the energy side, you know, what's going on and we still have a fairly significant backlog to deliver a timing of that delivery is somewhat out of our control, but we expect to deliver that over time.
Speaker Change: Great and as it relates to the arbitration ruling.
Speaker Change: This may be a no comment answer, but I'll ask the question anyway just.
Speaker Change: What are the next steps that Tesla could take if there are any is an appeal likely you know I realize I'm asking you to speculate so no worries if that's not possible.
Speaker Change: <unk> looked at and this is a highly confidential matter, but I can tell you. This.
Speaker Change: We have a definitive ruling for everything we have asked for I cant tell you what they will do and what they might try.
Speaker Change: We have a very very strong opinion, which is exactly what we were seeking.
Speaker Change: We have we own the rights to sell our proprietary internally developed solutions and we have the right to market and sell it to others, what they choose to do is outside our control, but we will contend to vigor. We will continue to vigorously defend this highly valuable asset as we go forward.
Speaker Change: And then as it relates to conversations with potential non Tesla customers. What are you hearing from them in terms of you know well this ruling be enough to give them comfort to move forward from your perspective.
Speaker Change: But to be honest with you Dan we got the rolling two days ago. We just opened the doors for business again yesterday I can't tell you yet what they are saying what they're not.
Steve Nicola: Understood last one for me, Steve the just remind us the $50 million run rate cost savings it sounds like it could be a little upside.
Steve Nicola: How much of that is expected to be achieved in fiscal 'twenty five and how much is there any that.
Steve Nicola: That remains beyond.
Steve Nicola: <unk> 26, and beyond thanks again for the color.
Steve Nicola: Sure, we expect to be at a run rate of $25 million to $30 million by the end of this year and the rest are achieved.
Steve Nicola: By the end of next fiscal year.
Steve Nicola: Very good I appreciate it.
Speaker Change: Our next question comes from the line of Justin Bergner with Gabelli. Please proceed with your question.
Speaker Change: Good morning, Joe Good morning, Steve.
Speaker Change: Good morning, Justin Good morning.
Speaker Change: A way to fight battles on multiple fronts at the same time.
Speaker Change: [laughter] wherever we can we can chew gum and walk.
Speaker Change: Just two quick questions here the arbitration ruling.
Is that due to the strategic review process as it relates to you know some of your growth businesses, particularly energy storage does that.
Speaker Change: Open up a set of possibilities that might have not been opened before.
Justin Bergner: A wonderful question Justin.
Justin Bergner: We announced strategic alternatives here.
Justin Bergner: Tober, but we have been evaluating that for the better part of 18 to 24 months most of our actions were already anticipated. When this dispute that began 18 months ago.
Justin Bergner: And you know what what we have looked for is opportunities to.
Justin Bergner: To highlight.
Justin Bergner: For the investing community the undervaluation of the smaller businesses, particularly our energy business by bringing in external investments are ultimately, perhaps even a spin of the whole entity or whatever it may be.
Justin Bergner: That is the evaluation that was going on before the dispute I expect that now with clarity on what we can do with this ruling.
Justin Bergner: We'll pick it up again can't tell you, it's going to happen overnight.
Justin Bergner: As we have demonstrated.
Justin Bergner: We will be patient to maximize the value for our shareholders as we did with S. G. K will do the same with these other businesses.
Gotcha, just so you have just to make sure I understood. What you said correctly. So you had been evaluating a spin.
Justin Bergner: Uh Huh I won't say, we are evaluating a spin we were I mean.
Speaker Change: To be blunt, we were looking at ways to highlight its value through external investment.
Justin Bergner: Okay.
Justin Bergner: Yeah.
Speaker Change: Gotcha and then just secondly, just any comment on product idea and warehouse automation kind of trends in demand looking forward in the next couple of quarters.
Speaker Change: I can tell you our product Densification is steady and growing is what you have seen for the last several years the launch of our new product will give us a modest uptick this year, but.
Speaker Change: We expect that to be a better contributor next year warehouse is seeing great interest again, as we've said before last year for everybody in the industry was relatively slow are we have a number of comparables that we looked at but warehouse right now quote activity and order intake has been better than last year and expecting a strong year for the year.
Speaker Change: Great. Thank you.
Speaker Change: Thank you Justin.
Speaker Change: Our next question comes from the line of Colin Rusch with Oppenheimer. Please proceed with your question.
Colin Rusch: Thanks, So much guys can.
Colin Rusch: Can you speak to whether it's Alan Yeah can you speak to whether Tesla is still a customer here.
Colin Rusch: Given the fact that there isn't any real alternative for them from an equipment our process side soon.
Speaker Change: I know that you guys are still engaged with those guys, but would just love to get any sort of update on that relationship outside of the arbitration.
Speaker Change: Well look I can't speak for them, we consider them a customer we still have a significant backlog to deliver their product as we go forward, we expect to deliver that product in due course and to be paid for it as we move forward I can't tell you whether they will remain a customer not that will be a choice that they make.
Speaker Change: But where our doors are always open.
Speaker Change: Okay Awesome and then protect technology perspective, you know you guys are continuing to make progress with the T V.
Speaker Change: Lots of and your ability to to move.
Speaker Change: Materials through through those tools can you talk a little bit about the cadence of that development and how we should think about that going forward.
Speaker Change: Sure I mean as you might expect we've been working on as we said on an on battery technology for over a decade. This is not a novel idea for us. So we've been working on this for a while and our team over there has continued to evolve.
Speaker Change: The both the equipment as well as its capabilities, but we see we see nothing but upside from continued develop we're prepared to kind of once those new technologies.
Speaker Change: As soon as our customers are willing to accept a but I would tell you.
Speaker Change: We have great hope one of the reasons, you're seeing the depressed our results in our industrial technologies segment as we continued to invest in that development.
Speaker Change: Not going to let it die in the mine. This ruling that we received gives us that clarity necessary to begin to speak more freely about those developments with our new customers and with our old.
Speaker Change: But what do you expect that to be nothing but upside for us going forward.
Speaker Change: Great. Thanks, so much guys I'll take the rest offline.
Speaker Change: Our next question comes from the line of Steve for Gogo and Lark Research. Please proceed with your question.
Speaker Change: Thank you a couple of from from me number one.
Speaker Change: What's your outlook for.
Speaker Change: Truck occurring expenses during the <unk>.
Speaker Change: This year.
Speaker Change: Going forward I know at the end of the fourth quarter you had.
Speaker Change: You booked elevated our strategic expenses is so.
Speaker Change: So it was that was the restructuring costs booked in the fourth quarter and now it will just be paying down the liabilities or do you intend anticipate any additional restructuring costs during the course of the year.
Speaker Change: So.
Speaker Change: Youre correct. So we did accrue some significant restructuring costs in our Q4 that.
Speaker Change: That will be that will be paying this year.
Speaker Change: I do expect additional restructuring costs as we continue down the path of our program.
Speaker Change: But they should continue to decline.
Speaker Change: Okay and in total savings I know you said, you're saying 50, but you also said.
Speaker Change: If I've got my number right $15 million.
Speaker Change: So is that 65 in total that we're looking at and what.
Speaker Change: What if the 15 as additional when do you think that that will be realized.
Speaker Change: Yeah, So Steve you cut out a little bit there, but I think what you're referencing is joe's remarks related to the S. T K transaction and future impact on corporate so you would be correct that those our expectation or the or that those are additive meaning that the current program our expectation is.
Speaker Change: $50 million and as I said in my remarks, we're on track for that and on track to potentially exceed that amount.
Speaker Change: The additional referenced that Joe made the $15 million would be once once.
Speaker Change: Once the S. G K transaction closes and once we get past that integration period in our transaction services obligation.
Speaker Change: That should result in meaningful reduction of corporate.
Speaker Change: Okay.
Speaker Change: And then.
Speaker Change: In terms of cash flow.
Speaker Change: You are right.
Speaker Change: You had as a result of it.
Speaker Change: At least in part of this strategic expenses that you booked in the fourth quarter I saw your other liability accounts Ah compensation accrued compensation account.
Speaker Change: With elevated at the end of the year.
Speaker Change: You know well above previous year levels.
Speaker Change: During the course of the year do you see yourself paying those down.
Speaker Change: And if so you know it will that return back to you now.
Speaker Change: Levels that we saw before the fourth quarter of last year and then in that case, you know what's the impact on your operating cash flow. During the course of the year do you still think that you can have positive operating cash flow from operating activities. During the course of the year.
Speaker Change: Yeah, Steve So I'll start with the last part of that we expect the operating cash flow between now and the end of the year to be positive.
Speaker Change: For some of the reasons you just mentioned we typically are in our first fiscal quarter that seasonally our slowest from a cash flow perspective, we see a.
Speaker Change: Seasonally lower earnings.
Speaker Change: But also we're paying year end related payments such as taxes.
Speaker Change: And end year end compensation related items, our annual insurance payments and the like and then in addition, as you mentioned our other liabilities at the end of the year were higher but that had a lot to do with or partly I should say to do with those cost reduction programs and accruals you view.
Speaker Change: Noted earlier, so I do expect as the year progresses that our working capital AR improves and that improves cash flow and you see that seasonally that's not just that's not just something specific to this year that's typical for us.
Speaker Change:
Speaker Change: Okay, but the the cash flow from operating activities.
Speaker Change: Do do you think that it will be similar.
Steve Nicola: Youre breaking you broke up a little bit there Steve.
Speaker Change: Hello.
Hello, I didn't hear the end of that yeah, we did not hear it.
Speaker Change: Alright.
Speaker Change: Okay.
Speaker Change: Christine I think you can move on to the next question. Thank you. Our next question comes from the line of Ethan Talus with Bank of America. Please proceed with your question.
Ethan Talus: Good morning, just a few questions on the capital structure here I guess first off what's the cat would you look to pay a look to repay with the SDK proceeds would you look at maybe the revolver and how much is currently drawn as of today our quarter end.
Speaker Change: So <unk>.
Speaker Change: So, yes, I mean, our initially and and obviously, it's dependent on the timing of the closing, but our expectation is that we're going to be closing the closing of the S. G. K transaction mid year. So my expectation is that we will take a substantial amount of those proceeds and immediately applied to.
Speaker Change: Our revolver debt.
Speaker Change: And when I say substantially I mean, we do expect a little bit of tax leakage, but really not a significant amount. So a substantial portion of that will go.
Speaker Change: That.
Speaker Change: One of the things that I think it's important to understand and I'll take you back to last year last.
Speaker Change: Last year, we refinanced our bonds and we refinanced during a tough period of time, if you recall.
Speaker Change: During that period of time and since then we've been under the overhang of the litigation.
Speaker Change: Well that litigation overhang.
Speaker Change: Caused higher than higher rates than than we.
Speaker Change: We thought we could have we could have achieved in a normal market condition. So.
So what we did was we.
Speaker Change: Set ourselves up instead of a typical five seven or eight year bond, we set up a short term shorter term bond three year bond with a one year no call.
Speaker Change: So that one year no call expires here at the end of September.
Speaker Change: And the interest rate on those bonds, our eight and five eights, that's the coupon rate.
Speaker Change: So we expect to be taking a hard look at that when that no call expires with those proceeds from the <unk> transaction.
Speaker Change: That's very helpful and that kind of leads me into my next question. How are you thinking about the first call price today versus waiting waiting for the bond the stepped down to par late next year I believe there may be callable later this year at like what a foreign change.
Speaker Change: Yeah. So that's an analysis will do at the time, but like I said before and.
Speaker Change: That's obviously something that's on our radar and when we set up the bond we set it up to be short term, we set it up to be callable in a shorter term. So that's.
Speaker Change: That's something that we'll take a look at <unk>.
Speaker Change: Yes.
Speaker Change: It is important for the market to understand we knew this SDK transaction was in the works. We also knew about the Oh.
Speaker Change: The Tesla litigation as well, we anticipated a closing on S. G. K during that time period. So it was intentional.
Speaker Change: But one year call.
Speaker Change: Very helpful. And then finally last one for me So post S. G. K you expect net leverage of sub three times do you have a leverage target in mind and maybe a timeline for when you think you would achieve that.
Speaker Change: He said you know our our publicly stated long term target is three or less on a leverage ratio. So this this transaction we.
Speaker Change: We expect that to accomplish that but we also expect to continue with a delevering emphasis post that.
Speaker Change: Very helpful. Thank you.
Speaker Change: Youre welcome.
Speaker Change: Mr. Nickel, we have no further questions at this time I'd like to turn the floor back over to you for closing comments.
Speaker Change: Thank you Christine and thank you everyone for participating this morning, and having have a great day.
Speaker Change: 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.