Matthews International Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
February 7, 2025

There are 9 speakers on the call.

Operator

Greetings, and welcome to the Matthews International First Quarter Fiscal twenty twenty five 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.

Operator

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Steve Nicola, Chief Financial Officer. Thank you, sir. You may begin.

Speaker 1

Thank you, Christine, and good morning. I'm Steve Nicola, Chief Financial Officer of Matthews. And with me today is Joe Bartolacci, our company's President and Chief Executive Officer. Before we start, I would like to remind you that our earnings release was posted on the company's 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 under Presentations.

Speaker 1

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 ks and other public filings with the SEC. 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. In connection with any forward looking statements or non GAAP financial information, please read the disclaimer included in today's presentation materials located on our website. Now I will turn the call over to Joe.

Speaker 2

Thank you, Steve. Good morning. To start our discussion today, I want to provide some color around an important development related to the company's energy business from earlier this week. On Wednesday, an 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 in advanced dry battery electrode technology and confirmed our right to continue marketing, offering and selling that technology to others. This ruling effectively clarifies our rights in this groundbreaking technology and reestablishes what we've been saying for years.

Speaker 2

We have valuable solutions founded on extensive know how and intellectual property to support the advancement of dry battery electrode technology and we have the right to sell it to others. After exhausting amicable efforts to negotiate a resolution with Tesla, Matthews was forced to file for a declaratory judgment in a binding arbitration seeking clarification of Matthews' rights to continue selling our innovative DBE solutions to others. Tesla ignored the contractual obligation to arbitrate confidentially and instead initiated litigation at federal court long after we filed our arbitration, vaguely alleging Matthews had stolen trade secrets. Tesla's retaliatory lawsuit coupled with numerous other threats in action has impaired our ability to work with others in the provision of DB solution and as a result has harmed our business. During the past eighteen months, we dutifully adhere to the terms of the parties arbitration agreement, which necessarily prevented us from fully disclosing was transferring behind the scenes.

Speaker 2

But given Tesla's public filing of the trade secret suit and our obligations under federal securities law, we are required to share this news with our shareholders and customers. 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. Pursuant to the arbitrator's ruling, we now intend to resume vigorously promoting our DVE solutions. Given the ongoing confidentiality considerations, I remain limited in what I can be what can be discussed at this time. Moving on to other exciting news, I'll now share some details in our recent announcement of the sale of STK Brand Solutions.

Speaker 2

On January 8, we announced the sale of SDK to a newly formed entity created with SG and S and Co, which will combine the two businesses. We believe that the deal creates a world class provider of brand solutions, which should be a highly attractive asset once integration is completed. The transaction will create an entity which begins with almost $100,000,000 of EBITDA, but is expected to generate $50,000,000 of synergies over the next twenty four to thirty months. In addition to the synergies created within the combined entities, the transaction substantially improved Matthews' operating structure and advances our business strategy for the following reasons. One, the deal significantly simplifies our operating and corporate structure, thereby allowing us to focus on higher growth and higher margin businesses.

Speaker 2

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 $15,000,000 2, the transaction as structured enables us to realize significant value for the Brand Solutions segment at an attractive mark multiple for an asset which was generally considered dilutive by the market to the overall valuation of Matthews. We received a multiple of 10 times for our 60% of SGK that was transferred to the new entity, significantly higher than anyone in the market had anticipated and about equal to the estimated value of all of SGK. 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 3.9 today pre transaction to less than three post transaction, which will decline further when we refinance the new entity and cash out our $50,000,000 of preferred instruments. Four, we retained significant upside as a new entity, which we believe upon exit will be a much stronger business than it is now.

Speaker 2

We also retained several significant SGK related assets, our German Rotor Gervior business and a critical software investment value that's over $20,000,000 today. We expect to exit these investments in the near future as we see the opportunity arise. We can provide additional details of the deal during Q and 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. We had been working on a deal with SGS and its previous owners since 2019. Those discussions included various private equity firms that owned SGS during the last five years and other entities including a minority business entity or MBE.

Speaker 2

We are close to an agreement on the deal in 2020 with the PE firm that then owned SGS, but the COVID pandemic and the market pressures that it created by the restructuring of the SGS ownership. As the world slowly began to recover, we again initiated discussions with SGS and the new PE owner in 2021. But then the Ukraine crisis in early twenty twenty two, resulting in a significant hit to commercial productivity in Europe for both businesses and resulted in yet another restructuring of the ownership of SGS. In 2023, we initiated sales discussions with an MBE outlining our structure whereby Matthews would retain a portion of a new entity to be created through the acquisition and the MBE would be the majority owner, allowing it to use its minority business status to generate business for the consumer goods from the consumer goods companies from which we would benefit from as a minority owner. However, the MBE chose another acquisition alternative.

Speaker 2

We then reengage with the current owners of SGS in 2024, which led us to the current deal structure. 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 SGK for our shareholders. Why is the multiple that we received we achieved so attractive much more than most had anticipated? Because even though Matthews is a minority owner in the deal, SGS is integrating into SGK's platform, a platform in which we have invested, a platform that has generated over $1,000,000,000 in adjusted EBITDA since its acquisition in 2014 and a platform that played a significant role in returning capital to our shareholders during that time period.

Speaker 2

Though we will not be running the new entity, the investments we made in SGK drove this deal and will ultimately result in significant value creation for our shareholders. In fact, one analyst note on the deal stated that we could generate a total consideration of close to $750,000,000 which would be almost equal to our market cap prior to the announcement date of the deal. We are awaiting approval from the Federal Trade Commission and expect the deal to close in the first half of this calendar year. As we work towards closing this deal, it's useful to look back on what has been created through our commitment to optimizing the value of our portfolio. Over the last ten years and despite the challenges posed by global pandemic and geopolitical events and regulatory challenges, our consolidated sales have grown 62%.

Speaker 2

During that time, our memorialization business has evolved into an industry leader. Our energy business has unlocked significant opportunities to create value that has not yet been fully appreciated by the market. And our warehouse automation and product identification businesses have found promising opportunities in innovative segments. We will continue to focus on driving growth at these emerging businesses, which will ultimately force us to evaluate the portfolio at an opportune time. Finally, turning to our upcoming annual shareholders meeting and the contested proxy.

Speaker 2

I asked you to realize that actions speak louder than words. In the last thirty days, this management team together with a 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. Both transactions required patience and a clear understanding by the Board of Directors of the value creation opportunity to be achieved upon success. In the SGK transaction, we will realize hundreds of millions of dollars more than the market and Barrington expected.

Speaker 2

Thanks to the patience of the Board of Directors. In the Tesla arbitration, the management and the Board of Directors had the will to initiate an action against one of the largest companies in the world to protect our rights to our highly valuable and proprietary DB technology. Both situations demonstrate 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. This value proposition is in stark contract 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. 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.

Speaker 2

I ask you to vote for our current slate of directors, especially given our recent announcements. Lastly, with respect to our outlook for the year, we are maintaining our guidance for adjusted EBITDA in the range $2.00 $5,000,000 to $215,000,000 This of course is dependent on the timing of the closing of the SGK transaction, which we will keep you informed of. Now I'll turn it over to Steve to talk about the results for the quarter.

Speaker 1

Thank you, Joe. And for the financial review, let's begin with Slide seven. For the fiscal twenty twenty five first quarter, the company reported a net loss of $3,500,000 or $0.11 per share compared to a net loss of $2,300,000 or $0.07 per share a year ago. On a non GAAP adjusted basis, net income attributable to the company for the current quarter was $4,300,000 or 0.14 per share compared to $11,300,000 or $0.37 per share last year. 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 1

Consolidated sales for the fiscal twenty twenty five first quarter were $401,800,000 compared to $450,000,000 a year ago. The decline primarily reflected lower sales for the Industrial Technology segment, mainly reflecting lower engineering sales. Additionally, sales for the Memorialization segment declined for the current quarter compared to a year ago, primarily due to lower unit volumes. Estimated U. S.

Speaker 1

Casketed deaths declined from the same quarter a year ago. Sales for the SGK Brand Solutions segment were modestly higher than the first quarter last year, which is continuing to benefit from more stable market conditions. Consolidated adjusted EBITDA for the fiscal twenty twenty five first quarter was $40,000,000 compared to $45,500,000 a year ago. The decrease primarily reflected a decline in the Industrial Technology segment. Adjusted EBITDA for the Memorialization and SGK Brand Solutions segments remained relatively steady compared to last year.

Speaker 1

In addition, corporate and other non operating costs were lower than a year ago, partly reflecting the company's ongoing cost reduction efforts. Please see the reconciliations of adjusted EBITDA and non GAAP adjusted earnings per share provided in our earnings release. Please move to Slide eight to review our segment results. Sales for the Memorialization segment for the fiscal twenty twenty five first quarter were $190,500,000 compared to $208,100,000 for the same quarter a year ago. The decrease primarily reflected lower Granite Memorial sales and a decline in casket unit volumes.

Speaker 1

Granite sales were higher last year as in addition to regular volume, the business was working down backlogs which had built up during the pandemic. The unit volume declines for caskets primarily reflected lower U. S. Casketed deaths. Bronze Memorial sales were also lower for the quarter.

Speaker 1

In addition, Memorialization sales for the current quarter were unfavorably impact by the disposal of the company's unprofitable European cremation and incineration equipment operations. These decreases were partially offset by higher price realization and incremental sales from the acquisition of a casket distributor in January 2024. Memorialization segment adjusted EBITDA for the current quarter was $36,600,000 which was relatively unchanged from $36,700,000 a year ago. 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. In addition, benefits from cost savings initiatives and improved pricing also contributed to the current quarter, which were partially offset by higher U.

Speaker 1

S. Healthcare costs. Please move to Slide nine. Sales for the Industrial Technology segment for the fiscal twenty twenty five first quarter were $80,500,000 compared to $111,400,000 a year ago. The engineering business reported significantly lower sales for the current quarter compared to a year ago, primarily reflecting the slowdown in the Tesla project and the impact of the litigation on work with other customers.

Speaker 1

Sales for the warehouse automation business were also lower for the quarter. 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 Olberk transaction a few years ago. The product identification business reported modestly higher sales compared to last year. Adjusted EBITDA for the Industrial Technology segment for the current quarter was $1,800,000 compared to $9,600,000 a year ago. The decrease primarily reflected the impact of lower sales for the engineering business.

Speaker 1

The adjusted EBITDA decline also reflected the impact of lower warehouse automation sales. 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. Please move to Slide 10. The SGK Brand Solutions segment reported sales of $130,800,000 for the quarter ended 12/31/2024, compared to $130,500,000 a year ago, representing an increase of $282,000 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. These increases were partially offset by a decline in brand experience sales and lower sales in the segment's European brand markets.

Speaker 1

Currency rate changes had an unfavorable impact of $700,000 on current quarter sales compared to a year ago. Adjusted EBITDA for the SGK Brand Solutions segment was 12,300,000 for the current quarter compared to $12,900,000 a year ago. The decrease primarily reflected higher wages and benefits for the current quarter, including increased U. S. Healthcare costs.

Speaker 1

These increases were substantially mitigated by the benefits of improved pricing to mitigate inflationary cost increases and the segment's recent cost reduction actions. Please move to Slide 11. Cash flow utilized in operating activities for the fiscal twenty twenty five first quarter was $25,000,000 compared to $27,300,000 a year ago. 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. 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 1

Outstanding debt was $8.00 $9,000,000 at 12/31/2024, compared to $776,000,000 at the September, representing an increase of $32,700,000 during the fiscal twenty twenty five first quarter. The company's net debt, which represents outstanding debt less cash was $776,000,000 at the end of the current quarter. At 12/31/2024, the company's net debt leverage ratio was 3.88, which is based on net debt and trailing twelve months adjusted EBITDA. Again, 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. In addition, the $250,000,000 cash proceeds from the SGK transaction, which is expected to close mid twenty twenty five will be substantially applied to debt reduction upon receipt.

Speaker 1

For the fiscal twenty twenty five first quarter, the company purchased approximately 171,000 shares under its stock repurchase program. These purchases were solely related to withholding taxes on equity compensation vesting. We remain primarily focused on debt reduction. There were approximately 31,000,000 shares outstanding at 12/31/2024. As we disclosed last quarter, we recently initiated cost reduction programs that span several of our business units and corporate functions.

Speaker 1

These programs are expected to result in annual consolidated savings up to $50,000,000 and today we are on track to achieve and potentially exceed this target. The most significant portions of the estimated savings will be from our engineering and tooling operations in Europe and our general and administrative costs. Finally, the Board declared last week a quarterly dividend of $0.25 per share on the company's common stock. The dividend is payable 02/24/2025 to stockholders of record February ten, twenty twenty five. This concludes the financial review and we will now open the call to any questions.

Speaker 1

Christine?

Operator

Thank you. We will now be conducting a question and answer session. Thank you. Our first question comes from the line of Liam Burke with B. Riley.

Operator

Please proceed with your question.

Speaker 3

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

Speaker 2

Good morning, Liam.

Speaker 3

Joe, could you give us a sense as I know this is going to be difficult, but you were building momentum in the DVE technology and sales prior to the Tesla lawsuit. Do you have any sense about how quickly you can reestablish momentum either in backlog or sales growth and any kind of general timeframes? I mean, as you said in the press release, you're reinitiating marketing initiatives immediately.

Speaker 2

Sure, Liam. I'll be glad to address that. First, let me address the fact that it was not with just the beginning of the lawsuit. There's been a private dispute for almost two years at this point in time 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 2

There is no shortage of people that have knocked on our door over the last eighteen months or so, twenty 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 proprietary DBE solution equipment. We expect that ramp to be slow at first because of the nature of, I would call it automotive EV production development. But as you saw in the last scale that we had with Tesla, we went from $20,000,000 to $50,000,000 to $80,000,000 to $120,000,000 pretty quickly with a $200,000,000 order or so for a number of people at that time.

Speaker 2

I expect that as we expand the portfolio of customers, we can expand pretty quickly.

Speaker 3

Okay, fair enough. But I mean, this is not a 25 at bat, this is a multi year bat, right?

Speaker 2

It's clearly we expect to have some benefit coming out into '25, but it'd be more around the announcements of with whom we're working with perhaps and their levels. We have we've had lab machines in the market. We've told you this before, we've had lab machines sold for years. So people have been testing and developing their own formulation without our help for many, many, many years. We expect that to ramp up more quickly.

Speaker 2

So, but I think key to that Liam is that it will be multiple customers rather than one. And that's what we've been inhibited from doing for the last several years.

Speaker 3

Great. And then very quickly, you have the new printer platform, is that on schedule? You've had a lot of things going on here?

Speaker 2

You think? We are in the midst of productions ramp up as we speak. That will 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 company.

Speaker 2

Two d code is coming folks and our technology is primed to take advantage of that. Two d 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, contain a lot more data and our ability to produce that unlike anybody in the marketplace today is going to be an advantage for us going forward.

Speaker 3

Great. Thank you, Joe.

Speaker 2

Yes.

Operator

Our next question comes from the line of Daniel Moore with CJS Securities. Please proceed with your question.

Speaker 4

Yes. Good morning. Thanks, Joe. Thanks, Steve. Memorialization typically good morning.

Speaker 4

It typically ebbs and flows, though the decline this quarter is a little bit larger than typical. What was the impact in Granite of kind of working down backlogs last year? And how would you quantify the impact of exiting the European cremation business?

Speaker 1

Yes, Dan. So the decline in revenues 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 granite volume. But again, the European cremation and incineration business, which was an unprofitable business for us, also was a significant contributor to that decline. So those two were the more significant pieces.

Speaker 2

And Dan, as we as Steve referenced to you, most of the decline in the Granite business had to do with work down of backlog post COVID that occurred last year this quarter. So we're back to a steady state volume at the Granite business as well. It was the last of the normalization.

Speaker 4

Okay. So that was going forward that shouldn't be a big headwind for the next several quarters.

Speaker 1

That's correct. How about

Speaker 4

the European exit? It was there much in the remind me of the timing of exiting the European business?

Speaker 1

We exited the European business in Q4 last year.

Speaker 4

Okay. Got it. Helpful. And then industrial, obviously energy storage, obviously, clearly on pause for obvious reasons. How much of the $30,000,000 decline in the quarter year on year relates to energy storage?

Speaker 4

How much is just general softness in warehouse automation, marketing products? I'm just trying to get a sense for the trajectory of the other non energy storage businesses and when we expect those to return to growth?

Speaker 2

The warehouse business was a modest part of it. The vast majority of the decline was in our energy business due to delays that we've referenced before and probably some implication from the lawsuits that we've been referring to. The warehouse business is seeing great uptick in interest as that 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. It is a lumpier business when it comes to investments in warehouses and that business is seeing that opportunity grow.

Speaker 2

So on the energy side, you know what's going on and we still have a fairly significant backlog to deliver. Timing of that delivery is somewhat out of our control, but we expect to deliver that over time.

Speaker 4

Great. And as it relates to the arbitration ruling, this may be a no comment answer, but I'll ask the question anyway. Just what are the next steps that Tesla could take if there are any? Is an appeal likely? I realize I'm asking you to speculate, so no worries if that's not possible.

Speaker 2

Look, Dan, this is a highly confidential matter, but I can tell you this. We have a definitive ruling for everything we had asked for. I can't tell you what they will do and what they might try. We have a very, very strong opinion, which is exactly what we were seeking. 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.

Speaker 2

What they choose to do is outside our control, but we will continue to vigorously defend this highly valuable asset as we go forward.

Speaker 4

And then as it relates to conversations with potential non Tesla customers, what are you hearing from them in terms of will this ruling be enough to give them comfort to move forward from your perspective?

Speaker 2

To be honest with you, Dan, we got the ruling two days ago. We just opened the doors for business again yesterday. I can't tell you yet what they're saying or what they're not.

Speaker 4

Understood. Last one for me, Steve. Just remind us the $50,000,000 run rate cost savings sounds like could be a little upside. How much of that is expected to be achieved in fiscal twenty twenty five? And how much is there any that remains beyond into 2026 and beyond?

Speaker 4

Thanks again for the color.

Speaker 1

Sure. We expect to be at a run rate of $25,000,000 to $30,000,000 by the end of this year and the rest achieved probably in the next fiscal year.

Speaker 4

Very good. Appreciate it.

Operator

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

Speaker 5

Good morning, Joe. Good morning, Steve.

Speaker 2

Good morning, Justin. Good morning.

Speaker 5

Way to fight battles on multiple fronts at the same time.

Speaker 2

Well, we can chew gum and walk.

Speaker 5

Just two quick questions here. The arbitration ruling, what does that do to the strategic review process as it relates to some of your growth businesses, particularly energy storage? Does that open up a set of possibilities that might have not been opened before?

Speaker 2

Wonderful question, Justin. We announced strategic alternatives here in October, but we have been evaluating that for the better part of eighteen to twenty four months. Most of our actions were already anticipated when this dispute began eighteen months ago. And what we have looked for is opportunities to highlight for the investing community, the undervaluation of these smaller businesses, particularly our energy business by bringing in external investments or ultimately perhaps even a spin of the whole entity or whatever it may be. That is the evaluation that was going on before the dispute.

Speaker 2

I expect that now with clarity on what we can do with this ruling, we'll pick it up again. Can't tell you it's going to happen overnight. As we have demonstrated, we will be patient to maximize the value for our shareholders as we did with SGK. We'll do the same with these other businesses.

Speaker 5

Got you. Just to make sure I understood what you said correctly, so you had been evaluating a spin?

Speaker 2

I won't say we were evaluating a spin. We were I mean to be blunt, we were looking at ways to highlight its value through external investment.

Speaker 5

Okay. Got you. And then just secondly, any comment on Product ID and warehouse automation kind of trends and demand looking forward in the next couple of quarters?

Speaker 2

I could tell you product identification is steady and growing as we have seen for the last several years. The launch of our new product will give us a modest uptick this year, but 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. We have a number of comparables that we look at, But whereas right now, quote activity and order intake is better than last year and expecting a strong year for the year.

Speaker 5

Great. Thank you.

Speaker 2

Thank you, Justin.

Operator

Our next question comes from the line of Colin Rusch with Oppenheimer. Please proceed with your question.

Speaker 6

Thanks so much, guys. Can you speak to whether Tesla is still a customer here, given the fact that there isn't any real alternative for them from an equipment or process side? I assume 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 2

Look, Colin, I can't speak for them. We consider them a customer. We still have a significant backlog to deliver of 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 or not.

Speaker 2

That will be a choice that they make, but our doors are always open.

Speaker 6

Okay, awesome. And then from a technology perspective, you guys continue to make progress with the DVE velocity and your ability to move new materials 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 2

Sure. I mean, as you might expect, I mean, we've been working on, as we said, 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, both the equipment as well as its capabilities. We see nothing but upside from continuing to develop.

Speaker 2

We're prepared to kind of launch those new technologies as soon as our customers are willing to accept. But I would tell you that we have great hope. One of the reasons you're seeing the depressed results in our Industrial Technologies segment is we continue to invest in that development. We're not going to let it die in the vine. This ruling that we receive gives us the clarity necessary to begin to speak more freely about those developments with our new customers and with our old, but we expect that to be nothing but upside for us going forward.

Speaker 6

Great. Thanks so much guys. I'll take the rest offline.

Operator

Our next question comes from the line of Steve Percoco with Lark Research. Please proceed with your question.

Speaker 7

Thank you. A couple from me. Number one, what's your outlook for restructuring expenses during this year going forward? I know at the end of the fourth quarter, you had you booked elevated strategic expenses. So was that was the restructuring cost booked in the fourth quarter and now we'll just be paying down those liabilities or do you anticipate any additional restructuring costs during the course of the year?

Speaker 1

So you're correct, Steve. So that we did accrue some significant restructuring costs in our Q4 that we'll be paying this year. I do expect additional restructuring costs as we continue down the path of our program, but they should continue to decline.

Speaker 7

Okay. And in total savings, I know you're saying $50,000,000 but you also said, if I've got my number right, dollars 15,000,000 in total. So is that 65,000,000 in total that we're looking at? And if the $15,000,000 is additional, when do you think that that will be realized?

Speaker 1

Yes. So Steve, you cut out a little bit there, but I think what you're referencing is Joe's remarks related to the SGK transaction and future impact on corporate. So you would be correct that those are expectation or that those are additive, meaning that the current program, our expectation is $50,000,000 And as I said in my remarks, we're on track for that and on track to potentially exceed that amount. The additional reference that Joe made the $15,000,000 would be once the SGK transaction closes and once we get past that integration period and our transaction services obligation, that should result in meaningful reduction of corporate.

Speaker 7

Okay. And then in terms of cash flow, you had as a result of the at least in part of the strategic expenses that you booked in the fourth quarter, your other liability accounts, compensation, accrued compensation account was elevated at the end of the year, well above previous year levels. During the course of the year, do you see yourself paying those down? And if so, will that return back to levels that we saw before the fourth quarter of last year? And then in that case, what's the impact on your operating cash flow during the course of the year?

Speaker 7

Do you still think that you can have positive cash flow from operating activities during the course of the year?

Speaker 1

Yes, 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 for some of the reasons you just mentioned. We typically in our first fiscal quarter that seasonally are slowest from a cash flow perspective. We see seasonally lower earnings, but also we're paying year end related payments such as taxes and year end compensation related items, annual insurance payments and the like.

Speaker 1

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 noted earlier. So I do expect as the year progresses that our working capital improves and that improves cash flow. And you see that seasonally, that's not just something specific to this year. That's typical for us.

Speaker 7

Okay. But the cash flow from operating activities, do you think that it will be some

Speaker 2

You broke up a little bit there, Steve.

Speaker 3

Hello?

Speaker 1

Hello? I didn't hear the end of that.

Speaker 2

Yes, we did not hear it. All

Speaker 1

right. Okay. Christine, I think you can move on to the next question.

Operator

Thank you. Our next question comes from the line of Ethan Kalas with Bank of America. Please proceed with your question.

Speaker 8

Good morning. Just a few questions on the capital structure here. I guess first off, which debt would you look to pay look to repay with the SGK proceeds? Would you look at maybe the revolver and how much is currently drawn as of today or a quarter end?

Speaker 1

So Ethan, so yes, I mean initially and obviously it's dependent on the timing of the closing, but our expectation is that we're going to be closing the transaction mid year. So my expectation is that we will take the substantial amount of those proceeds and immediately apply to our revolver debt. 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 to debt. One of the things that I think it's important to understand and I'll take you back to last year.

Speaker 1

Last year, we refinanced our bonds and we refinanced during a tough period of time, if you recall during that period of time and since then we've been under the overhang of the litigation. Well, that litigation overhang caused higher rates than we thought we could have achieved in normal market conditions. So what we did was we 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. So that one year no call expires here at the September and the interest rate on those bonds are 8.58% that's the coupon rate. So we expect to be taking a hard look at that when that no call expires with those proceeds from the SGK transaction.

Speaker 8

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 for the bond to step down to par late next year? I believe there may be callable later this year at like 104 and change.

Speaker 1

Yes, Ethan, that's an analysis we'll do at the time. But like I said before, 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 something that we'll take a look at.

Speaker 2

Yes, Ethan, I mean, it's important for the market to understand. We knew this SGK transaction was in the works. We also knew about the Tesla litigation as well. We anticipated a closing on SGK during that time period. So it was intentional to have a one year call.

Speaker 8

Very helpful. And then finally, last one for me. So post SGK, 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 1

Ethan, yes, our publicly stated long term target is three or less on a leverage ratio. So this transaction, we expect that to accomplish that, but we also expect to continue with a de levering emphasis post that.

Speaker 8

Very helpful. Thank you.

Speaker 1

You're welcome.

Operator

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

Speaker 1

Thank you, Christine, and thank you everyone for participating this morning and have a great day.

Operator

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.

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Earnings Conference Call
Matthews International Q1 2025
00:00 / 00:00