Greetings, and welcome to the Matthews International Corporation's Third Quarter Fiscal 2021 Financial Results. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder this conference is being recorded. I would now like to turn the conference over to your host, Bill Wilson, Senior Director of Finance, Corporate Development. Please go ahead.

Hi, thank you Brock, and good morning, everyone and welcome to the Matthews International third quarter fiscal year 2021 earnings 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.

Thank you Bill. Good morning. I'll start with slide 4. As provided in our earnings release yesterday, the company reported consolidated sales of $428.4 million and net income on a GAAP basis of $3.4 million or $0.10 per share for the quarter ended June 30, 2021, compared to sales of $359.4 million and net income on a GAAP basis of $2.3 million or $0.07 per share last year. On a year-to-date basis, the company reported consolidated sales of $1.23 billion and net income on a GAAP basis of $6.6 million or $0.21 per share as of June 30, 2021, compared to sales of $1.1 billion and a GAAP net loss of $94.6 million or $3.04 per share last year. The GAAP net loss a year ago primarily reflected the impact of a goodwill write-down. The key financial highlights for the fiscal 2021 third quarter included, first the company's consolidated sales of $428.4 million established another new quarterly record for the company and represented an increase of $69 million or 19.2% compared to a year ago. Second, consolidated adjusted EBITDA for the quarter ended June 30, 2021 was $60.0 million compared to $49.4 million last year, representing a year-over-year increase of 21.5%. Third, adjusted earnings per share for the fiscal 2021 third quarter was $0.91 per share compared with $0.80 for the fiscal 2020 third quarter, representing growth of approximately 14%. Lastly, during the recent quarter, the company again reduced its net debt leverage ratio. At June 30, 2021 our net debt leverage ratio measured based on net debt relative to the last 12 months adjusted EBITDA declined to 3.1 from 3.2 at March 31, 2021 and 3.9 at September 30 2020.

Thank you, Steve. Good morning. As you might expect, we are very pleased with our record-setting results for the quarter. Each of our segments delivered revenue growth during the quarter and our consolidated adjusted EBITDA grew significantly as well. Our Memorialization segment continued to deliver strong results except this quarter, as expected, the performance was provided by our Cemetery Products business while our Funeral Home Products business began to see the normalization of the death rate resulting from the vaccine implementation in North America.

Thank you. At this time, we'll be conducting a question-and-answer session. Our first question today is from Daniel Moore of CJS Securities. Please proceed with your question.

Thank you. Good morning, Joe. Good morning, Steve. Thanks for taking questions.

Good morning.

Good morning, Daniel.

Start with warehouse automation. Are you now largely back in your customers facilities? And should we expect kind of similar revenue in Q4 versus Q3? Just trying to see how much more business we can squeeze in before you get kicked out for the holidays.

So we are not back in all of our facilities and it has less to do with the pandemic than with our customers' ability to get hardware into their facilities. They're feeling the delays that conveyor systems and parts and components are causing on their warehouses. Despite that though, the revenues that we saw this quarter should be stronger next quarter and our forecast reflects what we're seeing. We also expect to leave the year with very, very strong backlogs given what the trends are at this point Dan.

Helpful. Energy storage closing in on $50 million of revenue I believe you said. What's the potential size of the opportunity over the next three years to five years? And maybe a little more detail around the hydrogen fuel cell that you're positioning and where you hope to be.

So as it relates to what we project for next year we're expecting another significant increase year-over-year based on our backlogs. We have strong backlogs and we don't even have all the orders we expect in-house yet. So we're feeling pretty comfortable next year we're going to see another significant increase. How big that could be is really not determined by us. We have the orders in house, but we are a component to an overall facility and the timing of those deliveries will reflect when we can recognize revenues. When it comes to hydrogen again we are in the rotary processing business. We take material and process it through large cylinders that weigh tons and tons that are hyper pressurized, hyper controlled and precision milled and manufactured and driven by sophisticated PLCs. This is a very, very complex business, but we think we can expand our footprint and our knowledge base into the fuel cell side of business. We made a small acquisition earlier in the year. You saw that. They bring know-how to the business. We bring our capability from the engineering side to manufacture production rate equipment. And our expectation unlike in the lithium business is not only to provide equipment to our customers that may want it. We intend to deliver fuel cells if we can as our own product.

Helpful. Maybe one more if I could. A lot of comments and just trying to triangulate them all, sort of, beyond let's say the next quarter. You said you expect positive momentum across some of the businesses to mitigate some of the unfavorable impacts of lower caskets and margins. So overall should we think about EBITDA being maybe net slightly lower for a few quarters on a year-over-year basis? Do you think you can offset it and grow a little bit? Just any -- just how we should be interpreting those would be greatly helpful.

So – I mean, clearly we like all the other companies in the world are feeling the inflationary pressures. Many of which we're starting to see them subside but many have not started to subside. Given how they flow through our inventories it could take a quarter or two or three while we go through that. We're not prepared today to tell you how that's going to impact us because we do have strength in a lot of our other businesses. But more importantly given where our net leverage ratio has gotten to we now have flexibility that we can do a lot of different things. There's a few acquisitions out there we'd like to talk about. There are other opportunities to continue to improve our business and invest. Or as I said at these prices we intend to be aggressive with our share buyback program. So a lot of different pieces of the puzzle at this point that will allow us to deliver value to the shareholder.

All right. You stole my last one as well. So I'll jump back in queue with any follow-ups. Thanks.

The next question is from Liam Burke of B. Riley. Please proceed with your question.

Thank you. Good morning, Joe. Good morning, Steve.

Good morning, Liam.

Good morning, Liam.

Joe, you had a nice contribution from cremation and incineration. Was that the major driver of the revenue growth out of memorialization? And what do the backlog numbers look like with the deliveries in the third quarter?

We had -- you're right. We got modest growth. It's nice growth for that business in and of itself, but the value that was being delivered was out of our cemetery products side of the business. We also saw a pretty good mix of products coming through on our funeral home products side. So as a result the real drivers were first cemetery products; secondary mix on the funeral home products; and third our cremation business.

And the backlog on the cremation systems is that still strong?

We're out 15 months -- 16 months.

Okay. Great. Thank you. And then I'm looking at retail. Are you anticipating -- in-store display. Are you anticipating any kind of step-up, sort of, modestly higher year-over-year revenue? Would you expect that revenue growth to accelerate going into the holiday season or the back-to-school season?

Interestingly enough Liam I would say that we would have hoped to but we're seeing reasonable, but not what I would call normalized spending in retail just yet. We're not disappointed with how our businesses are operating. They are better than they have been, but not at what I would expect a normal Christmas season and back-to-school season to be for in-store displays. That's pretty much the story with all of our retail side of the business whether it be private label packaging point of sale display work, marketing branding things of that nature that are more retail in nature. They're still behind which further buttresses the strength that we had out of SGK given the performance we have in what we call our core business which is packaging for CPGs.

Okay. Super. And just one more quick one. You mentioned higher development costs in industrial. Is that the printer development cost?

Yes, it is Liam. That is our printhead that is now out in beta testing at several sites. Suffice it to say, that we're extremely satisfied with its performance confirming its value proposition that we've all talked about for a long time. We are in the midst of moving that production from more of a university setting to a professional silicon chip fabrication lab. That process will take a bit of time and a little bit of expense as we go through that process, but we've kind of confirmed the size we've confirmed the value proposition. It's now to get it to production.

Great. Thank you, Joe.

Yes.

The next question is from David Niewood of Phoenix. Please proceed with your question. Sir, your line is open.

Hi. Sorry, I was on mute. Hi, Steve. Hi, Joe, and hi, Bill.

Good morning.

Since your last quarterly conference call there's been a lot of industry press as it relates to your energy storage business. And a lot of the industry press indicates that you are very much connected to what's known as the 4680 cylindrical lithium ion dry electrode battery process. And since in that news flow, it seems that there are several additional large battery companies that are evaluating the 4680. My question is, do you know of any 4680 processes or future players who are not doing this dry battery electrode? And if they are doing it as dry battery electrode, is it reasonable to assume that you're speaking to all of them? That's my first question. And then I have a follow-up.

Okay. So your first question David, interestingly enough, we've talked about this in the past. We are a cylindrical rotary processing equipment manufacturers with specialty knowledge in dry cell lithium processing with some patents around it and other IP that we've done. We've had years of experience in this space. We also operate in what I would call the wet cell process, but to a lower extent. We are -- our unique selling proposition into the wet cell process is not necessarily unique, unlike in our dry cell world where we are unique. But at the same time, the people we're being contacted by are both wet and dry cell. And suffice it to say that at least when it comes to the Western European world, we are talking to just about everybody.

Okay. Without naming names or customers, the commercialization of the 4680 cell -- dry cell lithium ion battery, there is a large player out there who says that they are not quite there yet, but are very close, and it has to do with the cylindrical performance of those large cylinders. In your mind, how solvable is that final hurdle to commercialization?

Look, at this point David, we're not in a position to speak to it, because there's a lot of components that are associated with not necessarily just our processes, but also the formulation of the lithium mix and the feeding of that mix through our process. So I can't tell you -- what we control is solvable. I can't tell you with respect to everything else.

I appreciate that and understand that I got in the weeds for these questions, but I appreciate the answers very much and I wish you guys continued success.

Thank you.

The next question is from Scott Blumenthal of Emerald Advisers. Please proceed with your question.

Good morning, Joe, Steve. Bill.

Good morning, Scott.

Good morning, Scott.

Joe, there's a natural ratio between cremation caskets and memorialization. And over the past year memorialization lagged. So I know in your comments you told -- you said that you thought you might be caught up by maybe by the end of the year here. But it would seem to me that essentially a year of depressed memorialization sales, you're going to catch up in maybe a quarter or 1.5 quarters or two quarters. Do you really think that by the end of the year here memorialization caught up?

No. My comments Scott were we have strong backlogs and we expect at least another strong quarter. So it's difficult tell. I would tell you there is a normal ramp to memorialize, and then there'll be a tapering off of volumes. I expect that to go through much of 2023 -- 2022, excuse me, but how much we get done and so forth. Our current forecast reflects what our expectations are today. Could it be more, could it be less? Sure. We have strong backlogs at this point.

Understood. So you were just providing us with what you think is going to happen for the rest of the year and not making any commentary on next year.

Absolutely not.

Okay. I really appreciate that. Okay. Also can you talk then maybe about incineration and cremation equipment, which would seem to me that that would be something that would be demand would be strong for worldwide considering what we've seen happening in certain places. I know you've had some business wins outside of the US and Europe. So have you been able to kind of expand the cremation incineration opportunity? And what do you believe that the total TAM is there?

The market continues to grow as you might expect. We are the leading provider of human cremation equipment in the world. We sell more equipment than anybody else by a long shot. As a result, our reach gets broader and broader. But I will tell you that outside of the United States most of the sales are made to municipalities. And as those municipalities have been constrained by what's going on with COVID in and of itself, you would expect those things to come over time. Our backlog includes a lot of product in Latin and South America, Australia, and we have a lot of backlog in Europe eastern and western as well. We're pretty comfortable that this is what we expect it to be, a strong long-term consistent player that continues to deliver value to the business.

Okay. I know that you haven't given backlog numbers historically. Can you give us an idea maybe Joe kind of the flip side of that as to where you stand maybe with book-to-bill this last quarter or maybe over the last couple of quarters?

For which business?

For incineration and cremation equipment.

As I said earlier, we've got backlog that is almost 15, 16 months. The issue is generally not whether we've got product to sell. It's more a question of whether a client is ready to accept the product. These are pieces of equipment that go into other facilities. There's construction, there's permitting and everything else associated with that.

Sure. Sure. And can I safely assume then Joe that backlog has expanded this past quarter?

Well, it's expanded over the course of the whole period modestly. But yes, the answer is yes.

Okay.

I think one of the areas, I think that has come to fruition during this pandemic has been the deferred maintenance that a lot of these facilities have had. As long as it was operating they never really kind of did what they should be doing. Those challenges came about throughout the pandemic as much of their equipment was unable to operate the way they would like. We think there's a good service function to come out for the next period of time.

Super. That's great to know. Now if I might ask one about packaging. We've seen kind of inflation. You're seeing it in raw material. Of course, consumers are seeing that in the grocery store. We've seen inflation impact encouraging the CP, the consumer product packaging companies to maybe kind of change downsize some of the packages. You've seen instead of increasing prices on some of the products maybe downsizing the size of the package and charging the same price. Are you seeing these trends and are they accelerating? And I would suspect if so, that's got to be pretty busy there.

That's part of the reason what you're seeing coming through in our numbers, Scott. Packaging, we do not have huge inflationary pressures in our packaging business. It's principally a service. We have some wage pressures, but not material pressures. But the volumes that we're seeing are very high at this time. We also picked up some new business during the pandemic given how our performance has been. Generally, we're very pleased where that is and the business was going to go through this cycle as you're right, a lot of these CPGs look to repackage into smaller sizes and new and improved or whatever it may be.

Great. Right. And maybe a last one if I may. The market opportunity for the printhead that's not just a new sale but also a replacement opportunity as well?

No question. There is an anticipated life based on the number of prints that are consumed by the printer -- or produced by the printer and then there's a replaceable printhead unlike what has historically been out there repair and maintenance service.

So, then we can safely assume that any existing Matthews installed printer is a candidate for an upgrade.

Every printer in our competitive space is a potential upgrade opportunity for us. We consider this a huge market opportunity. Not going to be realized today or tomorrow. This is a technology swing. And we've talked about this for a while. But the opportunity is to take what we consider a great performing small business in our portfolio and make it a significant contributor to our overall portfolio over time.

Got it. Thank you.

Okay. Thank you.

The next question is from Chris McGinnis of Sidoti & Company. Please proceed with your question.

Yeah. Good morning. Thanks for taking my question.

Good morning, Chris.

Can you just -- for us it seems like there may be a little bit of a change in the cemetery markets or just around memorialization. Have you seen that? Is that maybe changing as people coming out of the pandemic are recognizing and celebrating life a little bit differently? Have you seen anything change? Thanks.

We have not seen much of a significant change. In fact, if you look some of the larger competitors -- supply -- customers of ours have reported very significant preneed sales of cemetery properties. So in our world, we're seeing revenue flows consistent with what we might expect to be memorialized from the recent death rate.

Yeah. Okay. Thanks. And then just one other question, just around the EV and the demand that you're seeing and thinking about. Can you just talk about any capital needs to support that demand?

I would say that the capital needs are light. There may be some acquisition candidates we'll need to pull into the fray. But at the end of the day, it is not a big CapEx function. It's not to say that we're not going to spend money. We are going to absolutely spend money. But not to the degree that you might expect to grow to a $100 million business in the near term.

Great. Thanks for taking questions and good luck in Q4.

Thank you.

Thank you.

There are no additional questions at this time. I'd like to turn the call back to Bill Wilson for closing remarks.

Thank you, Brock, and thank you for joining us today and your interest in Matthews. For additional information about the company and our financial results, please contact me or visit our website. Thank you and enjoy the rest of your day.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.