Matthews International: Slow Orderbook Build And Not Great Delivery Rates (NASDAQ:MATW)

Matthews International (NASDAQ:MATW) is beginning to run into issues with producing better unit economics despite major order wins last year in its EV-exposed businesses. New order generation is also quite lumpy for the energy segment. However, they are still delivering a solid performance, and cost control measures are incoming for two of the major segments. In memorialization, they are also still dealing with tough comps, but there seems to be new business coming in cremation to offset both the secular and base effect-born declines in casket sales. SGK also seems to be bottoming out. Issues are mainly with unions, and we think contribution should get better on current backlog, and that deliveries should come into the next quarter to get a better result going, with the end of the year also seeing the introduction of a new printing product that should deliver great economics for the company.

Q1 Breakdown

The focus should be on Industrial Technologies, where the segment showed somewhat limited growth, despite the promise of last year’s large backlog growth that was the basis of quite a lot of its 2023 run. Customers weren’t ready to receive the equipment as rapidly as hoped and backlog isn’t liquidating very quickly, and this is with some of their largest customers. Management is signaling that the economics are getting a little lumpy. However, sales also declined a little from discontinuing some businesses in OBRICH and R+S, which are part of the value-add restructuring Matthews is doing with these acquisitions. Loss of scale and also inability to manage wage costs in the acquired European businesses, caused around a 20% decline in segment EBITDA.

There is $260 million in backlog, so it is down from last quarter, where it was around $330 million for the whole industrial technologies segment. The limited new order build is quite bearish, especially in the context of limited growth in the velocity of deliveries. In other words, book to bill ratios are falling for industrial technologies. Part of the reason is that smaller customers need to figure out their own processes in particular in energy and that the interest may be there, but the overall picture isn’t that great at least relative to last year, which admittedly was a huge year for the segment with the mammoth order that came in at the beginning of 2023.

Warehouse automation businesses continues to see some pressure, although it’s expected to improve into the latter half also in terms of mix, and the addition of the German businesses to support energy is creating a labor headwind, where it is harder to restructure, and Matthews is doing some divestitures of smaller businesses from the acquired Olbrich business that is talking some time to bear full effects. Olbrich and R+S were breakeven businesses when added, meant mainly to enhance the offering for OEM battery makers. They continued to deal with union contracts into the current quarter, where actions were only really taken now, and we won’t see the effects on profits until the coming quarters, where hopefully Olbrich and R+S will start contributing positively to the bottom line, rather than just being breakeven. Management continues to reiterate that it expects the segment to see profit and sales growth for the segment as it liquidates current, pretty large backlog and also court these new projects.

There is more than $100 million in backlog in energy which is doing well in terms of book to bill, and the pricing and deliveries in identification and surfaces is also positive. They also landed a contract to jointly develop a hydrogen fuel cell production plan with a major U.S. OEM, which should give an extra kick to energy solutions revenues.

In light of these activities and discussions, coupled with the fact that we are still working through approximately half of the $200 million in orders we announced last year, we currently believe that the energy solutions revenue will be higher in fiscal 2024 than in the previous year.

Joe Bartolacci, CEO of MATW

Memorialization saw declines in casket sales as the comps from last year still had COVID-related excess deaths, and would have seen sales declines were it not for the consolidation of Eagle Granite. But apparently the latest weeks have been seeing accelerated activity due to elevated mortality related to some pulmonary illnesses floating around. In general, seasonal effects are also in play for the current quarter, and we should see some improvements.

Also, while casketed burials are on a downtrend, the company is hoping to win new business in cremation systems with some ongoing contracts in the U.K., that they may or may not win. That should introduce a new stream and new geographic markets for growth in memorialization.

Margin ticked lower in memorialization as caskets fell, and granite memorials grew in the mix. Mainly a loss of scale from difficult comps.

SGK is actually winning business, and is trying to move into digital marketing services in addition to its brand and label consulting business. Cost control initiatives helped the EBITDA creep up.

Conclusions

Realistically, continued sales growth in the year can be expected for industrial technologies, given the business that it’s in, especially if warehouse recovers. We also think margins improve in Olbrich and R+S without too much issues once the union problems are passed.

They will also release the new printhead technology at the end of the year, another boost to industrial technology.

We think that a U.K. win, which would apparently be of significance, could help grow memorialization despite slightly lower YoY mortality and caskets in the mix.

Finally, we don’t see that much more incremental pressure with SGK, with the European economies already having seen a quarter of two of recessions or semi-recessions.

While apparently MATW is getting interest from almost all batter OEMs, we don’t want to hear about dialogue. We do think that the situation with the orders is a little bearish and that it’s big bites to chew these days from large customers that could come in lumpy, but we also recognize that the contribution from incrementally liquidated orders from before, particularly in energy which were coming in at $200 million in January last year and are only half done, should be able to deliver growth. At a pretty limited multiple under around 8x EV/EBITDA, we still see decent value here with no major incoming headwinds.