Greetings, and welcome to Matthews International Third Quarter Fiscal 2022 Financial Results Conference Call. 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 Corporate Development. Please go ahead, sir.

Thank you, Vikram. Good morning, everyone, and welcome to the Matthews International Third Quarter Fiscal Year 2022 Financial Results Conference Call. This is Bill Wilson, Senior Director of Corporate Development. With me 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 also be accessed in the Investors section of the website. In addition, as a reminder, beginning in the first quarter of fiscal 2022, the company transferred its Surfaces and engineered products businesses from the SGK Brand Solutions segment to the Industrial Technologies segment. Prior period results reflect this new segmentation. As a reminder, any forward-looking statements in connection with this discussion are being made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Factors that could cause the company's results to differ from those discussed today are set forth in the company's annual report on Form 10-K and other periodic 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. And now I'll turn the call over to Joe.

Thanks, Bill. Good morning. Our third quarter of fiscal '22 continues to present us with several challenges that we have faced throughout the year. But several new challenges accelerated quickly. Inflationary pressures in all of our businesses have impacted profitability, while supply chain issues have continued to impact our ability to control the timing of some deliveries. Additionally, during the quarter, we saw a rapid deterioration of the European market for our packaging business resulting from the progressively more challenging economic environment in that part of the world. The economic deterioration in Europe further drove the rapid decline in the euro and the U.K. pound negatively impacting our reported results. SGK was also faced with a couple of significant in-store project cancellations and delays in other projects due to supply chain challenges at our clients, or the inability of certain retailers to stack their stores, negating the need for in-store marketing. The combination of these challenges caused our SGK Brand Solutions segment to report very difficult results. Although these challenges are not the result of client losses or in any way of our making, we expect them to impact the balance of the year. Nevertheless, the remainder of our business has performed well in this difficult environment. On a constant currency basis, again, our Industrial Technology segment reported growth and remains on track to deliver a very strong year in 2022. More importantly, despite the continued positive performance, our order intake in this segment remained strong. Several significant orders in our energy business continued to progress well, while growing requests for proposals bode well for the future of this business. The recently announced acquisition of Olbrich will add nicely to this segment as they add about $20 million of energy related orders in the previous year as well. Like us,…

Thank you, Joe, and good morning. I'll begin the financial review with Slide 7. For the fiscal 2022 third quarter, we reported consolidated sales of $421.7 million compared to $428.4 million for the third fiscal quarter last year. As Joe just noted, European market conditions and the corresponding impact on currency rates, particularly the euro and British pound significantly affected comparability to last year. Relative to the reported decrease in consolidated sales of $6.7 million. The unfavorable impact of currency rate changes was $17.6 million. Memorialization sales were 10.2% higher for the current quarter compared with a year ago. Excluding currency impacts, fiscal 2022 third quarter sales for the Industrial Technologies segment also improved relative to a year ago. Year-to-date, these segments reported sales growth of 10.6% and 15.2% respectively over last year. On a GAAP basis, the company reported net income of $2.9 million or $0.9 per share, compared to $3.4 million or $0.10 per share for the same quarter last year. On a non-GAAP basis, adjusted EBITDA, which represents net income before interest expense, income taxes, depreciation and amortization and other adjustments, for the fiscal 2022 third quarter was $46 million, compared to $60 million last year. Lower consolidated sales for the quarter combined with the impact of higher material costs, increased labor and freight costs, and higher travel and entertainment expense were the primary factors in the year-over-year decline. In addition, currency rate changes had an unfavorable impact of $2.5 million on consolidated adjusted EBITDA for the current quarter compared with a year ago. Adjusted earnings per share was $0.58 for the current quarter compared to $0.91 last year, primarily reflecting the reduction in adjusted EBITDA. Please see the reconciliations of adjusted EBITDA and non-GAAP adjusted earnings per share in our earnings release. Investment income for the…

. We have a first question from the line of Daniel Moore with CJS Securities.

Let me start with SGK Brand Solutions, maybe just talk about the cadence of -- obviously, a lot of headwinds and challenges this quarter. The cadence of margin recovery, how long you see that will take playing out and maybe some of the steps that you can take in the coming quarters to get back to where we were maybe a quarter or 2 ago? And a quick follow-up or 2.

Sure. So when we look at SGK, Dan, as we said in the call, 2 principal areas that we had issues with. One, and the largest part of it is Europe. We are faced with 2 challenges there. One, currency, which we don't control, and we don't know when if or how that's ever going to come back or for that matter, whether it gets worse. But the other part of it was just flat out drop off of volume. Again, we noted that we did not lose any accounts whatsoever. There's just been a drying up of economic activity in that part of the world. So we would expect that to come back. Every one of the clients we've spoken with have suggested this is a temporary pause, and that would come back when things get a little bit better. Is it next quarter? Right now, we're not seeing that. So I would expect it to be over the course of the next 6 to 12 months that we'll get back to a more normalized rate at current -- whatever exchange rate it may be. We are taking actions in the meantime. You'll see some of those come through to reduce the size of our footprint over there. But at the same time, I think that this, I hope that this quarter is an anomaly for that part of the world and maybe another a little bit of a challenge going next quarter. The second part of the challenge, which is our brand business in-store marketing efforts, it is really a strange world and you heard my commentary about client, very large clients, unable to get products to be able to be marketed as well as others who can't staff their stores in order to be open, so therefore negating the need for in-store marketing efforts. I mean these are unique challenges that are specific to this period of time we're operating in. Again, clients there are long-standing, very large clients for us with reasonable margins that we expect that will return. It really is whether or not they can get product and that could come back as quickly as this quarter. It could come back in the quarter after that. It's difficult -- I mean, I'll give you a perfect example. We had a very large golf promotion going on across the United States at a large retail customer of ours. Couldn't get golf clubs out of China to be able to promote, cancelled. And that happens precipitously. They've got to have the product. Others who were waiting to get photographs to be able to put on to websites and on to e-commerce sites, they couldn't get the product to shoot. So, we've reduced our volumes there significantly. This is unique. It is not something that is inherent in the business as much as inherent in the operating environment we live in today.

That's really helpful. Maybe talk a little bit more about Olbrich. What you've seen since closing the acquisition and what they kind of bring to the table for you?

First, we've not closed. We are hoping to close in the next couple of weeks. We announced the agreement. We have authorization at the European Union Trade Authority to close. So we expect that to happen in the next couple of weeks. But they bring significant additions to the puzzle. As I've said before, we have a longer-term goal of adding various componentry to the production line for the equipment used to produce, dry electrode material. We also can use it for wet electrode as well. As you read more than we do, I'm sure, both the United States and the European Union are highly focused on trying to bring that onshore. We think we are the leading player, leading options for onshoring, particularly when you exclude the Asians. And at that point in time, we think this is a significant addition. They add coating lines and drying lines, things that we don't have, which are critical parts of that process. And we think that as we integrate that into our business, we will continue to expand our opportunities either through partnership or through acquisition, the ability to deliver that dry electrode material going forward. When it comes to R+S, which is a small part but a critical part, R+S represents automation engineering group out of the Czech Republic, but they have offices elsewhere in the world. They bring significant skill sets, both in the ability to help us get our product -- our current energy line off the lines and produce those and respond, frankly, even to technical RFPs, which we have difficult time getting to because of how much is coming in. But as I said in my commentary, the opportunity to expand both footprint and total addressable market in our Warehouse Automation and basically become factory automation as well. We think this is a big add that we'll see the benefit of over time. Our current Warehouse Automation business focuses principally in the e-commerce side of the world -- of the North American markets, bringing that footprint to Europe as well as elsewhere in the world where R+S can help us as well as expanding in North America into factory automation where R+S brings tremendous skill sets, we think it's a win-win. And it's not going to happen overnight, as you might expect, but it is part of the puzzle that we think we needed for a while.

Very good. Lastly, at least for the moment, just in terms of raw material costs on Memorialization side, where are we in the process of pricing gains catching up with the raw material inflation we're seeing? And are you seeing any flattening or even declining in some of those key inputs that you described that might help margins in the coming quarters?

So first, let's talk about Memorialization margins to help understand what's going on there. Our Memorialization margins when we look at our Funeral Home and Cemetery Products business, architectural products as well, remained at about 19%. This quarter, we had some fairly large charges in our European incineration business where we do waste-to-energy incineration. Those projects went negative for us from an accounting standpoint because we have -- if we believe there is a -- once we are aware that there is a potential loss on a project, we need to recognize it at this time. Several of those projects are large municipal projects that by contract have been going on for quite a while throughout the COVID period, and we're now feeling the impacts of commodity pressures, delays and everything else. Many of those contracts are in negotiation with those municipalities. Although we don't have contractual rights that obligate them to pay us, many of them have suggested a willingness to meet us along the way, knowing what has happened over the last several years, and we hope to recover some of those charges going forward. Can I count on that? No. But I believe we will see improvement out of that business next quarter and the quarters to come, bringing our overall Memorialization margin back into that 20-ish range that we have seen historically for a while. Direct answer to your comment around commodity side, we are starting to see some reduction in steel prices as well as in copper, the principal components of a couple of our businesses. Clearly, on the steel side, it takes a long time to get through. We won't see that in this quarter or next. But we still continue to feel pressure on the wage side. Wages and turnover remained significant in a couple of those businesses, and we are having to meet that demand going forward. We've raised prices on that business. We're coming up into a period of time here where traditionally, there have been price increases relative to a couple of those businesses. Some we lead, and we've been -- in those cases, principally on the Cemetery Products side, we have covered all of our material cost shortfalls. On the Funeral Home side, we still lag some of that. But from a positive standpoint, our volumes on Funeral Home remained strong relative to prior year despite the declining debt.

Next question from the line of Liam Burke with B. Riley.

Joe, you touched on in-store display on SGK. Could you give us a sense how the rest of the domestic business for SGK is doing?

Yes. The rest of North America was fairly consistent with what we expected, down relative to prior year modestly. But even in North America, and for that matter APAC, APAC and North America were down modestly. And most of those modest shortfalls were related to the mix of projects going through. So we think -- as I said, this is a in-store marketing effort challenge and Europe, Europe being a huge driver of the shortfall.

Okay. And on cremation, you mentioned -- or Steve mentioned in his prepared comments, the sales are up. Could you give us a sense as to how input costs are affecting that business? And that seems to be a pretty consistent grower for you.

Well, it's an interesting situation in that business. We are relatively small player when it comes to some of the components that are used in that particular business, principally burners and electronic controls. We have gone through multiple suppliers throughout the COVID period, trying to meet the demand that we have out there. Throughout that period, prices have escalated materially, we've had obligations to kind of substitute that. At the same time, we are having COVID outages, people not coming to work as a result of that, a significant turnover. But one of the most important parts of this has been that we have had situations where we are unable to pass along the price because a well-run business like ours gets paid before. We ship product in North America. A little difficult to raise your price when I've already paid for it. So that's one of the challenges we're having in North America. The U.K. side of it, I just mentioned to you, is having the challenges from a performance standpoint related to several relatively large projects. We hope those begin to turn. From a positive standpoint, the incineration business continues to get a lot of demand. And as we kind of get through this struggle that we're dealing with, which has really been lingering since COVID started in that part of the world for us, we think this business will be a nice add and continue to grow as you've seen, Liam.

We have next question from the line of Justin Bergner with Gabelli Funds.

I guess I wanted to start and just maybe ask a little bit about the performance sequentially. I mean if I look at the performance sequentially, SGK looks a little bit down in terms of sales and a little bit up in terms of EBITDA. So what you trying to suggest with the guidance that maybe SGK looks a little bit like this quarter, but the real weakness is going to come in the fourth quarter? And then I guess, conversely, Industrial Technologies, looks kind of flattish sequentially in terms of revenue and down in terms of EBITDA. So are you suggesting there that some of the headwinds are temporary and timing related, and that's going to sort of bounce back more in the fourth quarter?

So let's take that in two parts. So when it comes to SGK, we're expecting -- the currency is an aside. I mean, we really don't know where currency is going, Justin. If you look at the euro drop and the precipitousness over the matter of 40 days, the decline you see, is that going to stop or is it going to continue? It is difficult to tell. But SGK, I would tell you that it is not -- we don't expect it to get worse. That's not -- in fact, we hope it gets better here over the course of the next quarter or 2 as we move into the balance year from a sequential standpoint. On the industrial side, currency, again, remember, when we look at industrials, we break that into 2 parts, which is our Industrial Automation segment as well as our Surfaces and energy business that we have on the other side. The energy business is -- and Surface is all European for the most part. And currency took that down on a year-over-year revenue basis. When we look at going through the next quarter, we expect both our industrial automation and our energy business to be strong and be up for the quarter. So our guidance reflects, frankly, a couple of things. When we look at year-over-year, we're expecting currency to hit our bottom line $5 million, $6 million, $7 million from what we can tell today. And that's what we don't know. And then you couple with that a challenge for this quarter that we saw, particularly in SGK, we don't think that's going to -- it's not like we're going to pick that back up next quarter. Does that help?

Yes, that does help. So maybe you could just talk a little bit about some of the headwinds you felt in Industrial Technology in the third quarter. You mentioned some delays maybe in the Warehouse Automation side. The margin looked a little bit light sequentially --

Sure. Let's talk about the warehouse side. On the warehouse side, the challenges that we've had -- we've got a lot of backlogs, a lot of orders in-house, and we're going to be able to deliver that. We hope to be able to deliver that this quarter. Again, we've said this in the past, if my client can't get hardware and that's conveyors, pickers, sorters, things of that nature that are not dependent on us. If they can't get those installed, we can't install our automation systems. And that's what we saw a little bit of this quarter. We expect, based on what we know today, to be able to deliver those solutions or at least on a percentage basis, deliver those solutions this quarter because most of those projects that we have in the works have to be completed before the Christmas season. So I expect that we're going to see an improvement on a year-over-year basis in our Industrial Automation business, and that's based on what we have in-house today. On energy side, we were down this quarter. We were -- currency exacerbated that being down, but that's timing. Look, these are very, very large projects. Those very large projects are recorded on a percentage of completion basis for revenue recognition and profitability. We expect those projects to time out and improve over the course of this quarter. And we will then begin to fill the backlog again. We expect a better quarter on our fourth quarter for this business as well.

Okay. Great. Just finally on that, I mean the sequential revenue, I guess, Industrial Technology was flat. The sequential EBITDA was down. Was there a mix component to that or anything onetime related worth highlighting?

Justin, could you repeat that real quickly again? I missed the first part of that.

If I read the numbers correctly, the Industrial Technology revenue was flat sequentially, but the EBITDA was down sequentially. And I was just wondering if there was anything mix related or onetime headwinds?

It was a tough quarter. It was a tough comparison from last year. Steve will have a comment to it and might give you a little bit more detail.

Yes. Justin, actually, that's the currency. Because of the mix, the currency hit us harder in adjusted EBITDA that quarter. There was a $1 million impact year-over-year, just currency related in that business. So if you put that $1 million back to the bottom line, I think you'll true up on the comparability better.

We can't overstate what is happening in Europe, both from a currency standpoint and from an economic standpoint.

Okay. Great. And then just I'll throw one more in, which is -- can you say anything more specific about orders and backlogs on the Industrial Technology business? I know you don't sort of quote a backlog number, but just to get a sense as to --

I'll give you a perspective. On the Industrial Technology, the whole group, we are still sitting at 6 to 8 months' worth of backlog. I mean it is a significant backlog at this time and orders continue to come in. On the energy side, which is the most, I would tell you, it has significant impact given the size of the potential projects, we're having difficulty keeping up with requests for proposals. I mean it's that kind of situation. Now given the size, given the scope and given the type of technology we operate in, these are not decisions that are made overnight. And I'm not going to lie to you that we might have a quarter that is comparatively significantly different than prior year, but it doesn't change the demand outlook for this particular business. We have significant interest in it. One of the reasons we acquired Olbrich is not just the complementary product line it adds, but it has the capacity to help us move through these orders more quickly than they bring.

We have next question from the line of Daniel Moore with CJS Securities.

Yes. Just quickly, Steve, thoughts on free cash flow expectations for the remainder of this year and how you see fiscal '23 shaping up, if not specific numbers, just kind of broad strokes?

You're welcome, Dan. Free cash flow for the fourth quarter should be somewhat comparable to a year ago, but we are -- just so you know, we are spending more with respect to capital expenditures this year. If you'll recall, during the COVID period, fiscal 2020, 2021, we really worked on constraining capital and candidly, other spend during that period of time. So you've seen in our results year-to-date, and I expect that to continue into the fourth quarter. Secondarily, during the year -- well, 2 things. We've been -- our inventories have been building this year. I expect a little bit of that to continue into the fourth quarter as well. Commodity costs, as you would expect, those input costs also impact value of inventory. But also, as we recover from COVID, we are building back to more normal levels, particularly in our Memorialization business. So I would tell you, those are the factors in addition to adjusted EBITDA that will have the impact on operating cash flow into the fourth quarter. With respect to free cash flow, I do expect us to still remain active on share repurchases. But given the level in the third quarter and -- given the level in the third quarter, I expect we will be turning our attention back to debt in the fourth quarter.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I'd like to turn the call back to Steve Nicola for closing remarks. Over to you, sir.

Vikram, thank you. We'd like to thank everyone for participating in the call this morning, and we look forward to our fourth quarter earnings release and conference call in November. Thank you and have a good day.

Thank you very much, sir. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.