MATW - Matthews International: Lots Of M&A Discussion At The Q4 Call

2023-11-27 08:06:44 ET

Summary

• Matthews International reported earnings with promising organic sales growth but limited profit growth in the energy businesses.
• The company is looking forward to the release of the printhead and potential scaling through M&A on its more attractive platforms.
• Industrial technologies and memorialization businesses are expected to see sales growth and potential acquisitions to improve profitability in 2024.
• We still think memorialisation could accrete well especially if there ends up being a PE exit.

Matthews International ( MATW ) reported earnings. They weren't too bad. Inorganic effects brought up results in some of the segments, but there was also quite a lot of promising organic sales growth. The trouble is that in the most promising of their businesses catering to energy and EV, sales growth was not accompanied by much profit growth, so the unit economics need to improve in the coming quarters. Otherwise, we look forward to the printhead release, and we are interested in the kind of compounding that might go on in the M&A space, where there was a lot of discussion on the call.

Q4 Breakdown

We recently covered the Q3 results . The matters at hand were that while delivery of large projects was underway, profit growth in industrial technologies was limited, where a large inflow of EV related orders came through.

In Q4 , those effects continued. About half of the sales growth in industrial technologies, home to the calendering products that are getting employed in EV manufacturing, is coming from the fact that half of last year's Q4 had none of R+S and Olbrich's results consolidated . The rest is coming from positive organic factors, around $12 million of the $36 million observed of growth.

$200 million in orders came in for the energy segment at the beginning of the year, and half have been delivered albeit at pretty underwhelming margins, considering the limited profit growth in the segment. There was additional ordering in other parts of the industrial technologies segment, and overall the backlog ends up being $190 million higher than the beginning of 2023.

Warehouse automation activities that were within industrial technologies were among the weaker performers within the segment. Product identification performed well, but warehouse automation was down albeit with positive mix effects as there was a growing representation of software based revenues which tend to be higher margin.

There was more mention of the new disposable inkjet printhead technology that they've been hyping up since last year. The timeline is that the product should become commercialised in the latter half of 2024, and they claim it's about a $2 billion market. Frankly, management has been able to deliver on their promises in industrial technologies, and it sounds like a product that will introduce another attractive recurring income stream as part of the product identification business.

As mentioned in the last call, there are some expiries required before cost actions can be taken on the labour side. Newly recognised revenue should already start coming in at better margins hopefully starting next quarter.

For memorialisation, things were a little tough as there was a come-down from COVID-19 related deaths. An acquisition of Eagle Granite allowed for a solid YoY performance, but units have actually been down. It's reasonable to assume that these are the normalised levels now and that incrementally there should be improvement.

SGK performed surprisingly well despite continued weakness, especially on the profit side as price pass through has started to occur and also cost reduction actions.

Bottom Line

In the call there were quite a lot of comments around M&A that suggest that the company is continuing to be open to options to sell parts of its business to financial sponsors. For the memorialisation business management was coaxed into talking about the fact that they are planning on continuing to make accretive acquisitions to help the memorialisation bottom line, using the current business as a platform for new bolt-ons. When that business gets brought to a larger scale it's likely that it will eventually get acquired, since it's positively exposed to both casketed burials as well as cremations. This is likely supported by the activists as well.

For the industrial technology business, the company continues to be focused on bringing this more exciting segment to become a larger part of the mix. Acquisitions here could be a lot higher, towards the $100 million range in terms of possible size, and this might run into issues with the debt load which has gotten high also where interest expenses have begun to creep up. It will take a long time to pay down the current debt given the $30-50 million in cash flows available for debt repayment annually.

Overall, we expect that there should be continues sales growth in industrial tech, and that it should be accompanied by margin expansion incrementally. Likewise, we expect incremental strength in funerals and think that further acquisitions likely scale the business into being more attractive for private equity buyers, or interest from other strategics. We share again the SoTP.

With the price having now retreated, and with 2024 likely to be a decent year for the company, possibly against mounting economic currents, MATW could be a performer again.

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