Greetings, and welcome to the Matthews International Second Quarter Fiscal 2024 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Bill Wilson, Senior Director of Corporate Development. Thank you, sir. You may begin.

Thank you, Christine. Good morning, everyone, and welcome to the Matthews International Second Quarter Fiscal Year 2024 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'd 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. 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.

Thank you, Bill. Good morning. We are generally pleased with our fiscal '24 second quarter results given the transitory challenges that we faced in several of our businesses. Sales and adjusted EBITDA were relatively consistent, declining only slightly during the quarter due to macro trends impacting several of our businesses, while other businesses performed very well. Memorialization continues to maintain strong sales and EBITDA post-COVID, while SGK's digital initiatives and restructuring efforts are showing promise. As for our Industrial Technologies segment, energy solutions sales were higher, but we continue to see delays in customer installations. Additionally, the warehouse automation business reported lower sales, consistent with the overall market, which has seen a moderation in new warehouse development recently. Despite these near-term events, however, we see both businesses continuing to offer strong long-term growth opportunities. Sales for the Memorialization business remained relatively consistent with the prior year despite lower death rates. We're pleased with the trends in this business as the segment continues to outperform with sales and adjusted EBITDA run rates significantly exceeding pre-COVID levels. In addition, I'm pleased to add that we recently won another significant cemetery account, which we hope will afford us continued opportunity for growth as we offer our extensive portfolio of solutions. We continue to be encouraged by the performance of SGK as the segment reported sales growth in the second quarter despite continued challenges in the European market. Thanks to pricing and cost actions taken over the past 12 months, we also saw a significant increase in the segment's adjusted EBITDA and margin improvement. The team at SGK continue to outperform and win new accounts despite the challenges they have faced over the last year. They also continue to execute on the e-commerce digital initiative we mentioned last quarter. We expect this program to…

Thank you, Joe. Good morning. Let's begin with Slide 7. For the fiscal 2024 second quarter, net income attributable to the company was $9 million or $0.29 per share compared to $9.1 million or $0.29 per share a year ago. On a non-GAAP adjusted basis, earnings for the current quarter were $0.69 per share compared to $0.65 per share last year. Income tax benefits for the current quarter generally offset the impact of slightly lower consolidated adjusted EBITDA and higher interest expense. Consolidated sales for the quarter ended March 31, 2024, were $471.2 million compared to $479.6 million a year ago. Sales for the SGK Brand Solutions segment increased for the current quarter, and Memorialization sales remained relatively stable compared to last year. The Industrial Technologies segment reported lower sales than the same quarter a year ago with energy storage solutions sales offset by lower warehouse automation sales. Changes in currency rates were estimated to have a favorable impact of $4.8 million on fiscal 2024 consolidated sales compared to a year ago. Consolidated adjusted EBITDA for the fiscal 2024 second quarter was $56.8 million compared to $58.4 million a year ago. The SGK Brand Solutions segment reported higher adjusted EBITDA for the current quarter, which was offset by lower adjusted EBITDA in the Memorialization and Industrial Technologies segments. Please see the reconciliations of adjusted EBITDA and non-GAAP adjusted earnings per share provided in our earnings release. Please move to Slide 8 to review our segment results. Sales for the Memorialization segment for the fiscal 2024 second quarter were $222.2 million, which was relatively consistent with sales of $222.9 million for the same quarter a year ago. The recent acquisitions of a granite business in February 2023 and a casket distributor in January 2024, combined with the benefit of improved price…

[Operator Instructions] Our first question comes from the line of Daniel Moore with CJS Securities.

Let me start with energy storage. Yes, obviously, the end market slowdown in EV is very well documented, so absolutely no surprise there. Just looking beyond the next few quarters, you talked about it in your prepared remarks, Joe, but elaborate on what you're seeing and hearing from your customers as it relates to the longer-term transition to dry battery, to DBE production. Do you still expect that transition and the opportunity to be on par with what you would have thought maybe 4 to 6 quarters ago?

I would tell you the transition is in place. I think the issue is timing. I will -- as you mentioned, Dan, it is slowing a little, but our interest level has never been higher. The reality is the cost benefits, the efficiency, the productivity that comes out of our system and the better battery will ultimately be the winner, we believe. And it just slowed in the timing of when that it will occur. So we hope to have more discussion about this over the coming quarters, but nothing has changed from our perspective.

All right. And in the prepared remarks, you mentioned that the -- platform is not the right word. I wasn't typing fast enough, but you plan to build out a platform to enable faster production. Just elaborate on that, and is there any incremental expense or CapEx associated with it?

Yes. So the reality is that the cycle for adoption in the auto industry is lengthy, especially when something was as innovative and new as our technology. The process of going through from development to full production could take multiple years. A lot of that has to do with the fact that the development cycle is currently being done in-house at a lot of these locations, whether it be battery manufacturers or other OEMs. We believe that we have enough know-how and the ability to build a, what I would call, a production-like facility just for dry battery electrode, allowing our customers to come in-house with their formulation and accelerating the adoption. So they can basically produce their own batteries with their own formulations, do the testing that is necessary and already know what a production-like machine would look like. So I would call it the serialization of manufacturing equipment and at least eliminating a lot of the customization and testing that is done in advance. That's going to require probably $40 million worth of CapEx over the next 12 to 18 months, but well within our ability to fund.

Got it, very helpful. And then on the printhead solution product ID, just update us on the transition to the new chip provider and your confidence in ramping that product as we think about '25. Do you have orders in hand and it's just a matter of getting the technology buttoned up? Or do we need to kind of go out and test again as that new chip is implemented and integrated and functioning smoothly?

So we have -- we've had great success and very happy with our new provider out of Sweden that is helping us with the new chip. The current batch of wafers that have come in are exceptional. We've had, so far, no issues with respect to that. We expect -- as we described before, we are in line with our expectation to be in market early calendar '25. So by January, end of December, January, we should start to be out there. Do we have customers? These are not multimillion-dollar projects, Dan. These are $10,000 to $15,000 each, but there's a lot of them are sold. With the people we've already spoken to about what's coming, there's a lot of interest. Obviously, we're not going to start with the largest CPGs that are out there day 1. Just to make sure that what we believe is correct is -- and what we believe is a new and novel approach is functional and working well, so we don't burn it. But at the same time, we'll be in market here at the beginning of next year with a lot of upside to go. It's a very significant market out there that we don't participate in.

Perfect. And then I guess just one more, I'll jump back in queue, on SGK Brand Solutions. How much of the improvement in revenue is kind of easier comps and how much is a more sustained commitment to spending that you're seeing or hearing from your customers?

I guess the best way to describe it is that you've heard us speak about it, and you've read about it in the newspapers over the last several quarters, as CPGs have exhausted their ability to raise prices, they're having to reinvest in their brands through innovation and new product development. We believe this is sustainable. Most of the increase in top line came from North America. So you can see where that -- what's driving the markets, and we hope to be the leader as an industry into that spend. So I would tell you, it's much more sustainable and more -- hopefully, more to come.

Our next question comes from the line of Liam Burke with B. Riley Securities.

Joe, on Memorialization, cremation is still an important part of the business mix. How did that perform this quarter? And what's the outlook for the rest of the year?

So as we've said publicly before, we do about $125 million in product and services in the cremation segment. It performed well. I would tell you that the -- we still have some opportunities to improve performance out of our cremation equipment manufacturing business that the team is looking at right now, which should give us a good tailwind from that business going into next year, Liam.

Okay, great. Getting back to SGK, you did on your prepared statements talk about Europe branding, I guess, being up. But generally, you said that Europe remains a challenge. Are you just looking at easy comps? Or are you looking at sort of a fragile recovery there?

I would say easy comps. I mean it's -- I wouldn't say we've seen a recovery in Europe. The performance of the business still remains North America and some help out of the APAC region. Europe has a while to go yet.

And how did APAC do this year?

This quarter was okay and North America being the driver for the quarter.

Our next question comes from the line of Justin Bergner with Gabelli.

As you think about the revised EBITDA guidance for the current fiscal year, beyond the delays from your major energy storage customer, what are the other puts and takes to think about?

In terms of how comfortable we are? Justin, help me understand the question a little better.

Just parts of the business that are looking a little bit better than they were at the start of the fiscal year and parts of the business that were looking a little bit more challenged outside of the delays from the major energy storage customer.

I would tell you, and my summary comments are pretty consistent with that, Memorialization is performing much better than we had maybe initially expected for the year. There's a lot of unknowns when you start a year, especially on the demand side of that business. And we obviously think we picked up some market share, and that's performing well, and the new recent wins should help us as well. SGK as well is performing well. We expect that to continue to be the case. You could have a quarter that's going to change. But at the end of the day, we think that, that is a sustainable business that this year will be a contributor to our results. Product identification is well, performing very well. That -- there's a new team in place over there, and they are performing very well. And getting ready for the new launch should only make that business a bigger contributor as we go forward. Warehouse is challenged. I mean it's not -- I mean it's making money. This is not a question of whether it's profitable or not, it's a question of what we would have expected going into the year. If you look into the automated warehouse marketplace, you'll see our competitors, who are much more public about it, struggling as well. I mean these numbers could be off 20%, 30% on the top line. We're consistent with that. But we think that turns. I think that's a large capital spend. We've seen a number of our clients pull back on contracts because of the size of the capital spend, and maybe the interest rate environment might be impacting that as well. So warehouse has been a little bit of a challenge in going forward. I think I've covered just about all the businesses other than energy at that point.

Okay. Great. That's very helpful. On the energy side, you mentioned in the press release a benefit of orders from multiple customers. As the broader set of potential customers are able to kind of order production equipment more flexibly looking into later 2024 and early 2025, is that kind of really opening up the spigot for orders? And is that driving this likely $40 million CapEx investment to standardize or serialize the manufacturing equipment?

Yes. So I would -- I mean as it relates to the development cycle, to help you understand, you go from what I would call preproduction machine to a production prototype to a production machine, that is a multi-quarter process at a minimum. So what we're doing is, with the investment, making -- taking one of those turns out, that prototype machine as well as a lot of the testing that is done from the product that comes off to manufacturing. So right now, the orders that we're seeing, I would say, would be on the smaller side. They're beyond just a, what I would call, a lab machine. We're trying to take you from concept directly to production equipment with our investment, and that should shorten that cycle significantly.

Okay. Fantastic. But I guess the other part of my question was I think there was some intellectual property, I guess, issues that might have hindered the ability of some of your potential customers in the energy storage side to order production equipment that's probably rolling off. Has that accelerated the customer interest in the present time?

Yes. Now I understand your question. Yes, there is a -- there are patents that are held on dry battery electrode products that expires here in July. So the acceleration of interest and the, what I'd call, the interest in investing has accelerated because of that. No question about that. And we're trying to facilitate that with our investment.

Our next question comes from the line of Nick Ripostella with NR Management.

This is more of a big-picture question. All the investments you've made in these other businesses outside of Memorialization, how have they really benefited shareholders? If you look at the stock price -- so at any point, would you change the strategy and split up the businesses? Because shareholders really have not benefited for a long time from these businesses being together.

Yes, I understand your question. We have had -- we've been fairly public with the commentary. Our hope is to continue to build these smaller businesses to a scale and then to begin to look at the strategy of what the business looks like going forward. As they -- as a couple of these things come to market, whether it be the new printhead in the product identification and as energy starts to get some legs to it, I think it's fair to say that there will be an evaluation of what we're -- what the business looks like at that time. At this point, with these 3 businesses still being relatively nascent, I would say that we're probably not at that point just yet.

Okay. Fair enough. Well, I'll just say this, and by the way, your Investor Relations contact, apparently because I'm not an institutional, but I'm still a shareholder, a long-time shareholder, you can't get through to anyone to speak to or ask questions. I find that a little troubling, but...

I'm sorry. I'm sorry to hear that.

Well, I left many messages. But anyway, here's the issue. We all want to be long-term investors and there are promising technologies. I just hope that if the stock ends up under 20 or 19, and you never know what will happen as there's more pushouts and things, I'd like to see insiders buying a lot of stock. I just -- I hope that's the case. Because you're levered, you have to pay down debt now. You're in a situation where you really can't take advantage in any dramatic way. But that's it, I just wanted to reflect my opinions, my feelings.

Nick, we will -- I'll see to it that somebody can try to reach out if we can get your information. I'm sorry about the investor contact.

Our next question is a follow-up question from Daniel Moore with CJS Securities.

Just looking -- Steve, just kind of looking at the industrial tech, I think you called out some less engineering work. But just kind of looking at the decrementals this quarter to Q2 last year, EBITDA margin, the decremental is closer to 60% and a little bit higher than what you would normally think. So anything else going on or weighing on margins that might be unusual or temporary?

Dan, no...

Revenue decline?

Yes. The 2 things to mention just to highlight with respect to the industrial margins are, one, it's the revenue decline, particularly on the warehouse side. And again, it's -- when we look at the engineering business, revenue was higher, but the stage of the phases of the work that we're working on now versus where we were comparable to a year ago, last year was more the higher-margin, design-related work, engineering design-related work. So that's -- those are the 2 major elements to the margin impact.

Okay, helpful. And I appreciate the update on the debt. Just if you were to go to market today, any sense for what terms could look like on the refinancing bonds or wait and see given you have at least a reasonable amount of time between now and year-end?

Yes, we're -- actually, we're working through that now and just starting to get and understand some of those market indications.

Our next question is a follow-up question from Justin Bergner with Gabelli.

Two quick follow-ups here. You mentioned that as you deliver more equipment on the energy storage side, that will release working capital. Is there any way for you to frame sort of how much working capital is tied up and can be sort of released in that business?

See, I mean I'm looking at Steve. Steve, why don't we give a perspective on it? I would tell you that it is a significant amount of working capital, but closer to $80 million to $90 million, I would say, Steve?

Yes, Justin, I'd say the -- if -- when we release our 10-Q today, you'll see our balance sheet. But the areas -- the biggest area where you noticed the working capital and the opportunity is going to be in an area called -- the line item called contract assets, contract liabilities because those are the line items of working capital that really reflect the work that we've done based on, not necessarily what we've built because that would sit in accounts receivable, but the work that we've done and the difference between the revenue recognized versus when we've reached the milestones for billing purposes.

Got you. Okay. So it would be a contract asset or liability in this case?

It would actually be -- it could be both depending on where we sit with milestone payments on a particular aspect of a project. So you should see both line items.

Got you. And then the other quick question was the auto engineering business, which I assume relates to the acquisitions from a couple of years ago. I realize that's more to support your energy storage business or at least the acquisitions were. But is that business now profitable on an EBITDA basis? Or does it still have a little ways to go?

So there's a couple of things that are happening in that business. We are incrementally better than prior year, modestly profitable at this point. But we're looking at a substantial change in that organization, starting hopefully here in the latter part of this fiscal year as we've been in negotiations with the unions over there for quite a while, trying to get an adjustment both in terms of compensation as well as headcount. That's fairly significant. So we hope to talk a little bit more about that, Justin, a little later in the fiscal year once we get confirmation.

Mr. Wilson, we have no further questions at this time. I would like to turn the floor back over to you for closing comments.

Okay. Thank you, Christine. And again, 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. Enjoy the rest of your day.

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.