Greetings, and welcome to Matthews International Corporation Third Quarter Fiscal Year Financial Results. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded. I would now like to turn the conference over to Mr. Bill Wilson, Director of Finance, Corporate Development. Thank you, sir. You may begin.

Thank you, Latonya, and good morning, everyone, and welcome to the Matthews International third quarter fiscal year 2020 conference call. This is Bill Wilson, Senior Director of Corporate Development. With us today are Joe Bartolacci, 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.matw.com, in the Investors section last night. The presentation for our call can be accessed in the Investors section of the website as well. As a reminder, any forward-looking statements in connection with this discussion are being made pursuant to the safe harbor provisions of the Private Securities Litigations Reform Act of 1995. Factors that could cause the company's results to differ from those discussed today are set forth in the company's annual report on Form 10-K and other periodic filings with the SEC. In addition, we will be discussing non-GAAP financial metrics and encourage you to read the disclosures and reconciliation tables carefully as you consider these metrics. In connection with any forward-looking statements and non-GAAP financial information, please read the disclaimer included in today's presentation materials located on our website. And now I'll turn the call over to Steve Nicola, our Chief Financial Officer.

Thank you, Bill. Good morning. Please turn to slide four. As you read in our earnings announcement yesterday, the company generated strong cash flow from operations during the fiscal 2020 third quarter, and reported a significant reduction in outstanding debt. Our consolidated earnings for the quarter, combined with our working capital management efforts and proceeds from the divestiture of an investment, facilitated debt reduction of $104.9 million for the three months ended June 30, 2020. With respect to our operating results for the fiscal 2020 third quarter, the company reported consolidated sales of $359 million compared to $379 million a year ago. Year-to-date fiscal 2020 consolidated sales were $1.1 billion compared to $1.14 billion last year. For both the quarter and year-to-date periods, fiscal 2020 reflected higher sales for the Memorialization segment compared to a year ago, offset by lower sales in the SGK Brand Solutions and Industrial Technologies segments. All segments continue to experience some level of commercial impact from COVID-19 during the third quarter, although these impacts remain difficult to quantify. On a GAAP basis, the company reported earnings per share of $0.07 for the current quarter compared to $0.46 per share last year. A significant portion of the decrease related to noncash charges, including the acceleration beginning in the fiscal 2019 fourth quarter of the amortization of certain discontinued trade names in the SGK Brand Solutions segment, and a $10.6 million reserve for a letter of credit in connection with the previous incineration equipment project in Saudi Arabia. Intangible asset amortization expense was $17.8 million or $0.43 per share for the fiscal 2020 third quarter compared to $9.5 million or $0.24 per share a year ago. In addition, the decline in net income reflected charges related to the company's cost reduction program. Net income for the current…

Thank you, Steve. Good morning. We are very pleased by our results for the quarter, particularly given the challenging circumstances in which we operated, notwithstanding what we think is very good performance. Our reported results belie even better performance within the business segments, which give us confidence in the quarters to come. Several of our businesses outperformed prior-year results, but all of our businesses stepped up their efforts to manage their operating cash flow so as to deliver very strong operating results for the quarter. The combined efforts of good operating performance and strong cash management have allowed us to reduce our gross debt by $105 million during the most challenging times in modern history. We did all of this while maintaining a high level of compliance with strict safety protocols, which are designed to protect the health and safety of our employees. We are extremely proud of our colleagues in their performance on all fronts. We believe that this quarter, like no other quarter, demonstrates the significant underlying value of our consolidated business which is not reflected in our stock price today. Let's talk about some of those businesses. In our Memorialization segment for the quarter, our funeral home products business ramped up casket production early. And thanks to the sheer dedication of that team, we delivered revenue that was 17% higher than prior year. This team worked endless hours from manufacturing through distribution and sales to meet the needs of families during the pandemic. The performance of our funeral home products business helped offset a 17% decline in cemetery product revenue, which resulted from the various state shutdown orders and the general concern of the public to attend gathering such as funerals and burial services. We strongly believe that the lower cemetery products revenue is only deferred and…

Thank you. [Operator Instructions] Our first question comes from Daniel Moore with CJS Securities. Please proceed with your question.

Joe, Steve, good morning.

Hi, Dan.

Good morning, Dan.

Start with Brand Solutions SGK, seemingly held up better than I think some people feared in general. But can you elaborate on some of the incremental pricing pressure you're seeing? Is that more U.S., Europe, both? Is it in the core kind of prepress and creative, just pockets of where you're seeing that? And how long we would expect that to linger?

So I mean, much of what you're seeing in pricing pressure are contracts that were negotiated over the last 12 months. It's not we don't price on a day-to-day basis. So much of what we're seeing has been contractually anticipated. But when you look at the overall business then, I mean, if I can break it down a little better for you, just assume it's this simply, that in that brand business there are multiple segments of businesses that we serve. When you look at anything retail related, whether it’d be point of sale, whether it’d be private label, we are challenged. And that's where – that's why when we say our core packaging business has performed better than most people have expected. But consistent with what we've always said, that in challenging times brands often spend more, we are seeing that because we do expect that, that private label and retail business will come back. And if our rest of our brand business remains intact as we expected it will, we should have a good recovery into next year. The other side of it, we've talked about earlier, and these are pieces of the puzzle that are hard to discern. When we look at tobacco, tobacco, all but fell off a cliff, and that has everything to do with their unwillingness to kind of do any marketing initiatives in this environment. It just didn't need to. That business was significantly down year-over-year. We expect that to come back, albeit at maybe slower rates and but the pricing pressure is not something that is day-to-day. It's contractually anticipated, and we adjust our cost for that. And that's what you're seeing in our bottom line.

Got it. That's helpful. I think I heard you say, Joe, that you expect more "normal results" in Q4 and a strong recovery next year. Is that should we think of that as closer to flat in terms of revenue and EBITDA for Q4 or still down modestly – get back to growth. Go ahead.

I would tell you, down modestly in the fourth quarter, Dan. I mean, we're not seeing a strong recovery in retail yet. So that portion of the business remains a little bit under pressure, but it will be – it should be better than this – the results should be better than this quarter. And right now, we would say they are. Going into next year, I would say that the recovery in retail will be critical to the top line of our business as we move forward. We have made some gains in that from a client and opportunity side because of our ability to deliver in these uncertain times. So until those come to fruition, we're not going to be able to give you a look in the next year.

Okay. Understood. If we look beyond COVID, I know this is a tougher question, but what do you – what's the long-term growth algorithm for these businesses from your perspective? And what are the drivers that might get us there?

When you're speaking specifically of SGK?

Correct. Yes.

Okay. So when you're looking at SGK, I mean this is – I mean, it's what you're seeing is a good example of when brands choose to go back into the investment of new packaging, new products and new SKUs. I mean, our growth algorithms would predict what we've always said, which is volumes should increase 1% to 2%, maybe 3% a year. Pricing has been a little bit of a challenge as they have kind of constrained their costs. But in these uncertain times, we've seen that we've been able to deliver and some of our competitors have not. We're hoping that will ultimately result in a better market share for us as we move forward. And so that could give us some additional bump as well. But we are dependent on our brand's willingness and abilities to invest in new products and new SKUs.

Helpful. Okay. Switching gears, Joe, warehouse automation, it sounds like backlog is building, when would we expect to see growth pick up? And how large do you think that opportunity can be over the next kind of two to three years?

Well, that business is working in an environment where everything you talk about is e-commerce. And with the client base that we have, which reads like a who's who of retail and consumer brands, we expect – we see that business operating in a segment that is a high single, low double-digit opportunity for us over time. It's not going to be on a quarter-to-quarter basis, it's subject to the wins and timing of being able to get the warehouses and not be you're not going to see it in the fourth quarter, but in our first quarter of next year, excuse me, because we're not able to get into people's warehouses during the Christmas season. But the demand for that product continues to grow, and we have the reputation in the marketplace as being a leader to be able to deliver that for them. So we're confident of that business.

Got it. Got it. And one more topic for me, and I'll jump out. Very nice, obviously, strides on debt paydown. Leverage seems to be the number one focus on investors' minds these days. Do you – it sounds like you expect leverage to tick lower into Q4 as you generate more cash, but on the flip side, EBITDA may be down a little bit year-over-year. So do we see that 4.0 ticking slightly higher, slightly lower this coming quarter? And maybe over the next two to three years, Steve, what kind of ratios do you think are achievable to get down to?

So right now, Dan, based on what we see in the fourth quarter and what we see in our typical strong quarter operating cash generation quarter, if I can say it that way, I would expect at least relatively stable on the leverage ratio itself and maybe tick down a little bit depending on how successful we are on some of our cash flow efforts. And again, that's as we continue to primarily focus on debt reduction. But I will say, and I'll just – I'll refer to what I said in my comments earlier, that because of the strides we've been able to make and given the recent stock price, you may see us back in the market this quarter as well. So that obviously has an impact on where our cash flow is going for the quarter. And then, as we go forward, and, hopefully, as the whole country and world normalizes, we start to see growth on that on the EBITDA part of that equation. And that certainly helps the leverage ratio decline.

Got it. And just a follow-up, would you like to keep leverage at a minimum somewhere in level? Just getting a sense for how aggressive you could be on buybacks.

I would tell you that will be prudent on our capital allocation. If the price of our stock gets unreasonably low as it has been, we'll become more aggressive. We're comfortable with our ability to pay down our debt. And we've demonstrated that in this quarter. So I expect that if it gets silly out there, we'll be there. But otherwise, we'll be focused on what we've committed at the beginning of the year, which is paying down debt. Our long-term target still remains to get under three.

Okay. I'll jump back in queue. Then you follow-ups. Thank you.

At this time, I will turn it back over to management, there are no questions in queue, for closing comments.

Okay. Thank you, Latonya. And again, thank you for joining us today, and thank you for your interest in Matthews. For additional information about the company and our financial results, please visit our website. Thank you, and enjoy the rest of your day.

Ladies and gentlemen, thank you for your participation. You may disconnect your lines at this time. And have a great day.