Matthews International Corp 2026 Q3 Earnings Call

I'm Dan Stopar, Chief Financial Officer of Matthews, and with me today is Joe Bartolacci, our company's President and Chief Executive Officer. Before we start, I'd like to remind you that our earnings release was posted on the Investors section of the company's website, www.matw.com, last night. The presentation for our call can also be accessed in the Investors section of the website under Presentations. 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 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 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. Now I will turn the call over to Joe.

Thank you, Dan. Good morning, and thank you for joining us to discuss Matthews' fiscal 2026 third quarter results. Before I begin, I want to acknowledge that this was a difficult quarter. I'm going to be direct with you about the choices that we made, what happened, what didn't, and why we remain confident that we have taken action to prevent this from happening again. Moreover, I want to emphasize some exciting developments in our business in which we see significant opportunity. On our last quarter call, we told you four things could impact our full-year results: the pace and timing of engineering orders, the outcome of tariff discussions at the federal level, the timing of synergies at Propelis, and the economic impact of geopolitical challenges. This quarter, all four of those identified risks affected us negatively to some extent.

We would rather be direct about that than suggest that we're caught by surprise. We knew these were risks to our guidance, and we appropriately cautioned for those risks. Unfortunately, we did not expect that all of those risks would go against us. What this quarter did deliver. Propelis returned $25 million of our preferred equity as we have targeted, which we used to primarily bring down our debt balance. Memorialization continued its year-over-year improvement on a nine-month basis, and product identification sales grew 5% in the quarter compared to a year ago. Our corporate cost structure continued to come down, and we took decisive restructuring action in our European engineering operations. While painful in the near term, we expect this action, together with others, will prevent this from happening again. What this quarter did not deliver. The engineering order conversions at the timing we expected.

A memorialization death rate rebound that remained softer than we had modeled. Materially higher input costs, which we thought would dissipate. Propelis synergy capture in line with our expectations. I will address these head-on. The fiscal 2026 third quarter was a challenging quarter for us across most business segments, but in particular on our engineering business. We continue to experience delays in the energy storage solutions business, which are expected to extend through the balance of the fiscal year. Those delays are in line with the overcapacity for battery production across the industry. Importantly, however, we are commissioning our new mass production machine to be used to test chemistry formulas at mass production scale.

I'm happy to report that the line of OEMs and battery suppliers who have reserved time on the equipment starting in October continues to grow and represents the most significant interest that we have ever seen. Many of the leading players in the European, Japanese, Korean, and U.S. auto industries and several key players in the battery industry are back again at our doors seeking testing time, quotes, and joint development discussions. In particular, we are seeing accelerated interest in the commercialization of our DBE solution by auto manufacturers who have concluded they must own their own battery manufacturing capability in order to compete in the future. This is all good news as we continue to be the only provider to have developed a solution to meet this market need.

Regarding the balance of our engineering business, in our coating and converting business, known as OLBRICH, we won one of the orders that we had anticipated this quarter. Despite that order being significant, the project will not be a major contributor to our financial results this year. The order was received in early June, the customer immediately modified the scope of the work, thus limiting our ability to recognize any material revenues. Regarding other orders that we were anticipating, we were notified in early June that we lost two of those orders. Others are now not expected to be received until September. In response to these challenges, we have taken difficult but necessary action to reduce the cost base of this business by $10 million annually.

Unfortunately, being based in Germany, those actions are not as immediately impactful as they may be in the U.S. due to local regulations and unions which have negotiation rights. Most importantly, we are evaluating strategic alternatives for this business, a process which is expected to continue through the fourth quarter. During this time, we will be required to retain some of the talent, thus causing us to make the choice of being less than complete with our restructuring. These activities have delayed further action at this time, but should they fail, we will take the necessary actions to further restructure the business. Additional good news on the energy business front comes from our ultracapacitor capabilities. We are in the early stages of qualifying DBE electrode with potential partners to be sold into the industry as a finished product.

We remain optimistic about the opportunity. We are evaluating different business models. We are not going to put a timeline on a partnership announcement at this stage and note that this remains early-stage work. Suffice it to say that we have already produced the product, and we know the economic benefits that we bring to an existing, substantial industry. With regard to our energy business, our objective is to control our cost structure while not degrading the capabilities of our team. We know that we have a highly valuable know-how and are biding our time as the market comes to us. As I mentioned earlier, we initiated a restructuring program in our European operations. We have remained cautious not to cut to the core. We expect this business to show signs of improvement in 2027.

On the Tesla matter, the arbitration's liability phase is complete. The outcome affirmed the limited scope of Tesla's misappropriation and breach claims. The remaining phases of that case, Tesla's damage claim, which we do not believe are material. Our counterclaims, are moving through the process. The long-term thesis on DBE technology is intact. It is actually strengthening. If you follow the industry at all, LG has publicly stated its intent to pursue strategic DBE applications across new and existing facilities. They have specifically identified roll-to-roll processing as the most viable technology. As I have stated, we remain the most advanced provider in that space. Samsung and others continue to affirm DBE is a critical enabling technology for our next-generation battery chemistries. We are working with several solid-state battery providers on joint marketing solutions to deliver the end product.

Regarding our memorialization business, we continue to experience headwinds in terms of lower volumes as a result of its record low death rate, combined with significantly higher input costs, which have escalated beyond our inflationary price increases. We have watched as copper prices have gone from $4.50 per pound to $6.60 per pound and continue to rise. Steel prices have risen 21% on a year-over-year basis, while fuel costs have outstripped our expectations that we had when we provided guidance last quarter. Although we have raised prices. We intend to continue to do so in order to meet our rising costs, the speed and magnitude of cost increases have materially outpaced our price increases, particularly where we have fixed contracts which do not allow more frequent price adjustments.

The memorialization segment reported sales of $208 million for the third quarter, up from $204 million a year ago, a 2.1% increase on a reported basis. Adjusted EBITDA was $42.2 million, roughly in line with the prior year's $42.8 million. For the first nine months of fiscal 2026, memorialization has delivered $130 million in adjusted EBITDA, compared to $124.5 million in the prior year, a 4.4% improvement that demonstrates the fundamental health and stability of this segment. Our memorialization revenue stepped down from Q2's $215.3 million to Q3's $208 million reflects a consistent seasonal pattern in this business. Casket volume is an at-need product that peaks alongside flu season in our second quarter and steps down in the third.

Bronze and granite memorial products work on a lag, particularly in the Northeast, where installations wait for ground to thaw, which is why our third and fourth quarters are typically the strongest for our memorial products and our first quarter is seasonally weak across the industry. Layered on top of that ordinary seasonal pattern this year, casket and cemetery memorial volumes continued to be a headwind due to lower estimated U.S. casketed deaths, a trend felt across the industry. To give you a sense of the industry backdrop, published U.S. mortality data show the overall death rate fell to its lowest recorded level last year, down approximately 4.6%, the largest annual decline on record as a share of the population. We build our forecast on the assumption that volume would improve in the second half, consistent with historical patterns.