Welcome to Matthews International Corporation Fourth Quarter and Year-end Fiscal 2020 Financial Results. . At this time, I'll turn the conference over to Bill Wilson, Senior Director of Corporate Development. Mr. Wilson, you may begin.

Thank you, Rob. Good morning, everyone, and welcome to the Matthews International Fourth Quarter and Fiscal Year-end 2020 Conference Call. This is Bill Wilson, Senior Director of Corporate Development. With us today are Joe Bartolacci, President and Chief Executive Officer; and Steve Nicola, our Chief Financial Officer.

Thank you, Bill, and good morning. Please turn to Slide 4. There are several key items that I want to highlight from our earnings announcement yesterday regarding our consolidated financial results for the fiscal 2020 fourth quarter and fiscal year. First, the company, again, reported strong operating cash flow as we continued to emphasize cash generation in this challenging environment. For fiscal 2020, the company set a new record for cash flow from operations of over $180 million. Second, the company, again, reduced its outstanding debt and leverage ratio during the recent quarter. For fiscal 2020, we reduced our outstanding debt by $106 million and our net leverage ratio to below 4, specifically 3.9 at September 30, 2020. Third, we reported growth in consolidated sales, adjusted EBITDA and adjusted earnings per share for the fiscal 2020 fourth quarter compared to the same quarter last year. With respect to COVID-19, all segments continued to experience some level of varying commercial impacts from COVID-19 during the fourth quarter. These impacts still remain difficult to quantify, and as the pandemic has continued into the December quarter, we expect ongoing impacts into our 2021 fiscal year. On a GAAP basis, the company reported earnings per share of $0.24 for the current quarter compared to a loss of $2.28 per share last year. The fourth quarter last year included a goodwill write-down of $77.6 million or $2.42 per share. Also, earnings per share on a GAAP basis for both quarters included the impact of the acceleration of the amortization of certain discontinued trade names in the SGK Brand Solutions segment.

Thank you, Steve. Good morning. Again, this quarter, we are very pleased with our results, particularly given the ongoing circumstances in which we operated. Once again, we demonstrated the resiliency of our portfolio of businesses as our Memorialization business delivered very strong results, while all but one of the remaining significant businesses delivered remarkably stable results. We truly believe the resiliency of our various businesses is the most underappreciated facet of our company.

. And our first question is from the line of Daniel Moore with CJS Securities.

I wanted to start with Memorialization. Obviously, very strong results in the quarter. Curious how you see those continuing, just kind of how you see fiscal Q1 shaping up in broad stroke terms relative to fiscal -- the quarter that you just posted?

So I mean, you all read the same newspapers that we read. So I would -- as what we're seeing today is relatively consistent performance with what we saw last quarter going into our first quarter of 2021 on that business. And for that matter, the rest of the businesses that we have. And we have businesses that operate in core parts of a lot of our clients that are critical to getting them where they need to be, whether it be packaging, whether it be in our industrial automation businesses. But our Memorialization business, as you all are abundantly aware, are tied to death rates and those remain elevated at this time.

Very helpful. And one of the things you talk about for quarter 2 now is the memorials or markers, bronze and granite being delayed, obviously, because of stay-at-home orders. Do we still expect -- is that opportunity set continuing to build the longer it lingers? Does that impact the likelihood of families going back and purchasing markers? Just kind of what -- I don't know if there's any examples historically to pull on, but any thoughts there?

I mean the last time we had this kind of an event that would have been around the 2008-2009 financial crisis. And those memorials did come back. Just what I want to caution everybody is it doesn't come back in the next quarter or in the next maybe 12 months. We saw orders coming in over the next 24 to 36 months. Now more at the beginning rather than the latter part, but at the end of the day, those sites generally get marked. So right now, we are operating at rates more consistent with normalized levels of deaths, which would tell you that with the -- as you all know, the hundreds of thousands of people that may have passed at some point in time should come to being memorialized. I just can't tell you when.

Understood. Okay. And maybe one more, and I'll hand it over. But Brand Solutions, maybe just talk about the conversations what they're like now with larger CPGs? Are folks starting to look at new product upgrades, new versions, designs for '21? Or has it been kind of largely the status, the same level of activity that we've seen for the last, say, 12 months?

So if you take a look at the underneath the covers of that segment, we break up that segment really into what we call our core business and then we take a look at it, surfaces, cylinders, engineering. On the core business, frankly, we had relatively strong results last quarter and not so bad, the quarter before that. And that is despite what I would call really challenging environments in the retail segment, whether it be our private label work that we do for grocers or whether it be the in-store displays that we do with our merchandising business. Those 2 businesses, frankly, have struggled. And so if you take a look at where the core business has performed, we're pretty pleased. I mean, we like it to be really robust, sure. But it has not been anything that anybody would have expected. And we always have said, packaging is a critical nature in these kinds of environments. Oftentimes, you see an uptick in those packaging efforts to try and to entice and encourage consumers to spend and revise. And that's what we saw in this event as well. We hope that there -- and we believe that there is a significant amount of pent-up demand when it looks at retail as a whole. At the end of the day, for all practical purpose, let me give you perspective. We don't believe we have done any kind of significant work and not much significant work has been done in the retail segment in-store since before Christmas of 2019. So we are -- by the time this pandemic gets past its current state and gets into store openings, again, let's say, 6 to 9 months out, we will be better than 20 months without having done any retail investment. So we expect it to be a significant buildup pent -- demand at that point in time. We know we had contracts that were in place at the beginning of the pandemic that were canceled, that were very significant. We think those things come back at the end. In the meantime, we expect our core packaging business to remain relatively stable over this period, maybe upticks with some wins that we had, but we'll see how that plays out. We don't have a lot of visibility 12 months out to suggest we're going to have a lot of new packaging. That's just the nature of the business.

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

Joe, could you sort of parse the CPG business, U.S. versus Europe? I imagine Europe with all of the shutdowns and whatnot, have been a little more challenging, on that side? And I wanted to get a sense after that, how COVID has influenced the U.S. CPG business? Or they continue to invest on through?

So it's a great question. You can divide and subdivide and subdivide in a lot of little facets, but let's kind of break it down geographically first. In North America, frankly, we did better this year than we did the year before. And that was on the backs of a number of clients. Well, a number of the clients that we do business with was significantly -- were significantly down. We do work in the beverage industry. We do a lot of work in the food industry. But in the beverage industry where you see things tied to restaurants and sporting events and things of that nature, we've seen one of our largest clients spend fractionally of what they spent on a normal basis. They try to contain costs to move forward. Whereas in other areas, in the cereal world and in the breakfast food world, we've seen just an explosion of new products that are trying to meet a new demand that the consumer is staying at home and eating there. Now geographically, in Europe, you're right. The shutdowns have impacted them more significantly, less people -- less consumer spending as a whole in a market that traditionally probably stays home more than North America does in general. But we expect that to reverse. I mean this is not a forever market. But when we look at the portfolio of our overall businesses, APAC was relatively stable. So we think that business has performed exceptionally well in these challenging times, which was probably very misunderstood by the market because of what they expect. We are not printers. We are not the high end of the design spectrum. We have businesses that do that, and those businesses have been challenged. We do a lot of work, for example, for Air France. Air France's spending is significantly down. But overall, what we call the core packaging business has performed very, very well in these challenging times.

Great. And on the cremation front, is incineration -- do you have any incineration in that backlog number?

Yes. Yes, we do. In fact, projects that we expected to occur in 2020 were postponed, as you might expect, because of the environment. A lot of that work is done in the U.K. You all know as well as we do what's happening in the U.K. with various shutdowns, and probably the epicenter of what's going on in Europe today. But those incineration projects remain in discussion. I would tell you they probably have ramped up a little bit as people have accepted that this is more part of their normal working environment right now, we can't wait. We expect today is a big word when we can't control, expect but not control those projects to be done this year, at least substantially completed this year.

Okay. And just a quick clarification, Joe. Even in your prepared comments, you said relative on the 2021, I know you're not giving guidance, but you're just sort of giving us a directional sense. Relatively steady year-over-year over 2020, is that on a revenue or on an EBITDA basis?

I mean, we speak on the EBITDA basis, but we would expect our revenue not to be materially off. And we give that guidance knowing that we have the opportunity for more, but really can't control whether we can deliver more.

So it is EBITDA, it isn't revenue. Okay, so it's EBITDA. Okay.

Well, it was principally EBITDA and revenue.

Our next question is from the line of Scott Blumenthal with Emerald Advisers.

Steve, this one's for you. Terrific gross margin performance year-over-year, great work there on the working capital. I think you had a $60 million swing or something there. Any other opportunities in order to pull a little bit more cash out of there? And let's start with that one.

So Scott, yes, we're working on that all the time. We believe there are opportunities. It's, I guess, a couple of points to make. One, when you think about the environment that we're in and the progress that we made on working capital, we certainly set a difficult threshold for next year. So having said that though, if you recall, several years ago when we implemented our ERP, we talked about the opportunity to optimize our systems once we are on one global ERP. And we're going through those -- we're going through that work now. Some of that is embedded in the cost initiative that we talked about, that project that we talked about. But one of the outcomes that we're looking for from that is more improvement in working capital. So I do expect there's more to come. But I would -- I think I would be overly optimistic to suggest that it's going to be at the same level and as quick as we were able to achieve in fiscal '20.

Have you enunciated a working capital to sales target at all?

No, we have not.

Okay. All right. And Joe, you mentioned that the backlog is the largest ever backlog in the history of Matthews. I suspect that some of that has to do with the fact that you weren't able to get on to customer sites for certain projects in cremation and in industrial. I know that you don't give a backlog number, but can you kind of size that up compared to where we were at this time? Is it 25% higher? Is it 50% higher? Maybe just give us kind of a gauge there.

Yes, it's difficult. Each one of our businesses are -- as you might expect, in our Memorialization segment other than our cremation equipment business, we do not have a backlog that lasts more than 4 weeks, essentially. So that's not -- that's not where we see the backlog. Cremation, dollar-wise, is probably 5% to 10% higher than year before at this time at least. I can't give you a specific number there. But you're right, on the warehouse side, we're 20% to 25% higher than we were because we couldn't get things out and new orders continued to come in. I caution you, though, because, for example -- I'll give you a perfect example of a recent win that added to that portfolio was a U.S. client operating in Canada. Well, I can't get into Canada today to do the work. So when can I get in there? How am I going to get in there? And that's why we remain cautious over the course of next year. We just don't know. But the other part of the puzzle is we had talked about on surfaces, cylinders and engineering. Our engineering business, which is where our energy storage function is located has tripled its backlog for all practical purposes. Now I'm not going to give you dollar amounts associated with that, but it's a big number that we're very proud of, and we hope it to be a significant contributor that we'll talk about over the course of the year. But again, things that we are not in control of, those orders will ultimately be delivered. Our expectation is they'll be delivered over the course of 2021, but I don't control whether they can be.

Sure. Will either of you be able to venture a guess as to how much of an impact you feel you had on Q4 sales, just by the fact that you weren't able to get on to customer sites for any number of reasons?

Customer sites? I mean, not necessarily that -- I mean, look, the simple answer to that is our expectations in our industrial automation business would have been, they would have a better year-over-year result. And they were $1 million down. Could have been $1 million, $3 million, $5 million, it's not $50 million. It's not fair. So I don't want to mislead you there. But sure, I mean, we expected to have better year-over-year results. We had poor year-over-year results by a modest amount. So that's the kind of number that would -- we would have been closer to flat year-over-year.

Next question comes from the line of Bruce Geller with Geller Ventures.

I admire the company's resilience through a very difficult period here.

So do we.

As a shareholder, I appreciate that. On this -- both this call and the last call, you've made some references to an energy storage component to your engineering business. Could you please elaborate on what exactly that is? How large the backlog is there? How big of a business this is for you today? And how big the potential opportunity is for you? And then also how that business even fits within a segment called Brand Solutions?

Innovation. That's what really -- how it fits there. But let me kind of kind of go through and dissect a couple of those questions. So first off, our engineering business is principally a purpose-built equipment group. What they do historically has made equipment that utilizes our technology and capacity to produce cylindrical solutions. Meaning I work in areas right now and our gravure cylinder business over in Germany, particularly, where I produce printing cylinders that print packages and wallpaper and other related products. Well, that printing technology, that cylindrical solution is used to produce in the engineering business, solutions that do everything from tissues, nonwovens, paper towels, feminine hygiene, anything that is produced in a roller capacity. Now the energy storage business that we referred to is the effort of several years, multiple years and investments that we've made with the group over there to understand how we can take the cylindrical solutions and purpose-built equipment business to calendar lithium, amongst other things, or embossed plates that are used in fuel cells. And it is the same types of solutions that you might look at when you look at a printing technology, but a highly, highly sophisticated piece of equipment that can take raw lithium in whatever form of fixture or mixture that you may have to produce the sheets that are necessary for a lithium-ion battery or produce embossed plates that are used in fuel cells. The market is anything you want it to be. It's still a relatively small business for us today in our overall portfolio. It is something we have invested in and we continue to invest with. We have some intellectual property in the space that we are very, very, very proud of and protective of. But we have high hopes for it. It could be a significant contributor over the course of the next 2, 3, 4 years or even this year for that matter. Does that answer your question?

So how large is that business today, roughly on an annualized run rate?

We probably did $40 million or $50 million this year. Go ahead.

And how many -- I mean, like how many customers does that represent? Is that one big customer and you're looking for others? Or are you involved with many customers in that industry at the moment? I'm just wondering how diversified this business is?

Much of what we've been operating in has been in pilot lines of testing. So we have done work for a lot of different players in the industry whether they test out their formulations to try to determine how to produce the batteries, and principally in the auto industry right now, but obviously has application elsewhere. And -- but we've talked to and sold to a lot of different players. Smaller pieces of equipment than what we are talking about, which is the production size scale.

So with this being a $40 million to $50 million business today, with the projected growth in the industry. I'm sure you're reluctant to throw numbers out, but is this something that could be multiples of the current size that it is today based on their projected growth in the industry and your position within it?

Look, as all you know, this is the early stages of energy development. We think we have a solution. We think we have a great solution. Is it the only solution? I mean, we're not that well aware of what's in the marketplace. It could be multiples of that. We hope it to be multiples of that. But we also don't know all the other available solutions that could be applied to produce what we do today. So hard answer -- hard question to answer for us relative to what we play. But I will tell you, we have operated in this space in a smaller scale for almost a decade.

That's great. And then I guess, to my initial question, how does it fit in the segment even? I mean, should you guys have an engineering segment to highlight this business?

Well, in its current size, we have not, but we clearly have those kinds of discussions. It's probably something that as -- assuming it grows, we'll start to reposition it into our Industrial Technologies segment and highlight it.

Yes. Bruce, it's really the evolution because right now, it's evolved out of the cylinders business, which supports our Brand Business in Europe today.

Your next question is from the line of Daniel Moore with CJS Securities.

Again, just wanted to -- maybe of those things that are in your control as we look at fiscal '21, talk about the balance between additional cost containment initiatives and maybe some temporary expense reductions that would come back in '21? And order of magnitude of sort of the net of those?

So we have had a fairly significant initiative going on in our German and our U.S. markets for cost benefits to be achieved utilizing SAP. We've talked about this before. I would say we are 1/3 of the way there, and we have a fairly significant run rate to go over the next 12 to 24 months that we'll continue to benefit from. I mean, a good estimate on that is that we will substantially improve our results based on our investment we made in SAP, and that's a true benefit for that. The return of, what I would call, normalized expenses, is anybody's bet. And I mean, it's anybody's bet. I mean, we are currently -- I won't call it -- I mean, our own form of lockdown, our people are still working from home. Our -- and where we can, we're reducing travel. Unfortunately, some of our businesses have to travel. I mean, it's difficult to do service on a cremator from Apopka, Florida. We've got to get to the site or do an installation for a warehouse without travel. So what we're really seeing is cost containment in our travel and entertainment on the sales side more than anything else. And right now, that might be a more permanent change, maybe not to the same extent we have right now, but a more permanent change in our overall cost structure going forward. We'll see. I mean it's hard to estimate what you're asking for, Dan. I mean it's just a difficult environment.

Okay. And just maybe, Steve, to pin down a little bit more on cash flow. Any sense for CapEx for fiscal '21? And it seemed like you were indicating you could get more benefit from working capital. I would have thought maybe it -- potentially a headwind in fiscal '21 after you're holding the line that hard. Did I hear that right that you think you could see a little bit more benefit this year?

I think we've got a longer-term working capital benefit from the initial -- from the initiatives that we have going on. I do think you're right, Dan. We're at least going to work hard to hold the line working capital year-over-year. So for modeling purposes, I think that would be my best recommendation. With respect to CapEx, I -- given the environment that we're in, I think we're still going to be prudent on -- from a cash flow perspective. So traditionally, in a normal year, we might be mid-40s, mid-$40 million range. Right now, I would see us less than that, but a little bit more than what we spent this year, which was $33 million, $34 million.

Perfect. And lastly, just an update on -- you spent a few dollars, at least on buybacks. I know you've been adamant that, obviously, the shares are undervalued. Just how you're thinking about balancing leverage debt reduction with additional buybacks as we get into fiscal '21?

Well, Dan, I think I would tell you that what we demonstrated over the course of the year is we have the ability to generate cash and get ourselves right in a difficult environment. If our stock was where it was $17, $18, not that long ago, you bet we will be applying all of that cash we generate to buying back our shares. As we move forward, I think we've created the headroom to be able to do whatever we need to do. If we think it's an important part of where our cash flows are coming in and we think their price still does not reflect where our -- where we need to be, then we'll take that action as well. We'll balance the 2.

Our next question is from the line of David Niewood with Phoenix Insurance Company.

Phoenix is a relatively new shareholder, but we're happy with the impressive all around performance in a difficult period. I did want to, if I may, follow-up on the energy storage issue that was discussed previously. The popular -- it's been in the public domain, I wouldn't say the popular press, industry press has suggested that Saueressig is working with Tesla on their dry battery electrode technology. And given the numbers discussed, in terms of what your business has done, curious -- you may not be able to speak specifically about specific customers or the like. If the $40 million to $50 million is specific mostly to one customer. And if it is exclusive when listening to Tesla talk about their dry battery electrode, they're talking about something that's going from tens of gigawatts to as much as a need of 3 terawatt hours, which suggests anywhere from 10s to even 100 multiple fold of potential business. And so the question is, is it right to think about it in those terms? Is there exclusivity? Or can you sell to the broader industry?

So first off, we're not going to talk about our individual customers. I can't -- I'm not going to deny or confirm individual customers. I would tell you that we do not have exclusivity with anybody today as to operating in this space. And we are providing solutions to multiple players out there. You're right, the markets could be astronomical. We think we've got wonderful IP, and that's what we talked about before. But I don't know what else is out there. And I'm not -- I don't profess to be the only solution that they can look to. But we've got a wonderful team. We've got wonderful IP, and it's not -- and it's turning out to be proven.

The next question is from the line of Austin Nelson with AIG.

I just wanted to go back to the backlog questions and really specifically around Memorialization. The results weren't particularly surprising to me. I know it was very impressive that you were able to keep up with all the demand. But given that you had the inability to place memorials that were -- otherwise would have been purchased last quarter, and we did have some reopening and then the continued demand for caskets. Like my question is, do you kind of have a sense if you think about how many caskets you sold and the growth on that and the mason, the cremation stuff as well versus what happened on the memorial side? What pent-up demand is there to then deliver memorials? And a follow-up to that, the -- at least the publicly traded customers of yours have actually reported very strong pre-need sales in the last quarter. Do you -- are you seeing that flow through to pre-need sales in your Memorialization business as well? So beyond a perceived backlog, do you actually have growth in -- what will later be booked but will essentially go into the trust?

You obviously understand the market. So you're right, our clients have report -- our large publicly traded group have sold in advance a lot of pre-need sales, but that doesn't translate to an order to us until they collect and pay. And so you're right. Our orders on the memorials have been -- around pre-need have been pretty much nonexistent. We're behind significantly where we normally have -- would be. And we would expect that to come over time. That, again, is not in our control, but it is clearly an order to come. When you take a look at our casket volume, and I mean to dissect the pieces for you. And Steve, correct me, we sold on a prior year basis 40,000 caskets more, plus or minus. And if you think about that from the standpoint of 40,000 deaths, which should translate to rough numbers, 40% in markers -- 30% of markers and 70% in stone. But we do not -- we have a strong share of the stone market, but not as strong of a share that we have in the bronze market. If you slice that 30%, let's say, 20,000 bronze markers that will ultimately be marked, we have 65% of that. So you're somewhere in that 20,000 -- 15,000 to 20,000 markers yet to come, we believe. Now how fast or how -- and that's probably 10% better, 15% better than we are today in terms of units. But there's other sides to that story as well. When we operate -- we do about $100 million in the cremation industry as a whole, $50 million of which is equipment and service, plus or minus. And $50 million or so that we do in everything from urns to memorials to niches and other solutions in that space. So we'll get some of that as well as time moves on.

That's very helpful. And then just one more on Brand Solutions. So it was much better than I had expected. So congratulations there. And I think I understand what you're saying that the core packaging business is doing well. And I mean, if you look at the results, the big CPGs that are -- your customers are finally growing again. And maybe there is some pandemic benefit. But just on the retail pent-up demand side. I guess, can you kind of segment it for me? The way I always thought about it was that it was essentially a lot of end caps and that kind of thing. So to some extent, you'll have lost sales because those are weekly promotions or that kind of thing. But is it essentially that there are no end caps because they're just trying to stock up on everything they can, and there's really no need to do promotions? And when we get to normalization, you'll have that -- I'm sorry. No, go ahead.

No, no, no, no, no. I mean, it's a good question. It's not -- we don't do end caps. We're not a corrugated box guy that puts an end cap out there. We do a lot of in-store, store-in-store functions. So for example, for a large television electronics supplier, global, we do complete in-store refurbishing of marketing displays that are everything from brass and glass to metal to graphics to whatever it's associated. These are $10 million to $15 million projects on a national basis that is done. We also do work in things like the fast food industry, where we've done some work with a large national fast food industry. We do work in a lot of places that are in-store that have not had foot traffic, and therefore, have not had the spend that you're going to have. I would not suggest that those are lost sales in a sense that -- we may not do that exact same program again, but the desire to redo in-store displays as we talk about them, will come back. And we think it's pent-up and I can't give you a number on it because I just don't know. Our discussions are with our recurring client base that when those stores reopen, there's almost two years' worth of delayed investment that will have to come in all at one time. And given the timing of the pandemic, if these vaccines turn out to be what they will be, we'll be hitting it right around pre-Christmas season, which is usually our biggest quarter anyway. So we're fairly bullish on that, presuming we're able to get through this next 6 to 9 months.

Yes. That sounds very helpful. That makes a lot of sense. There are essentially big capital projects that have been...

Yes, they are. They're not small. We're not talking about $200,000 projects.

At this time, we've reached the end of the question-and-answer session. Bill, we have no additional questions at this time.

Thank you, Rob, and thank you for joining us today and for your interest in Matthews. We plan to file our 10-K later today. And again, as a reminder, for additional information about the company and our financial results, please contact me or visit our website. Enjoy the rest of your day. Thank you.

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