Matthews International Corp (MATW) 2022 Q2 法說會逐字稿

Greetings, and welcome to the Matthews International Second Quarter Fiscal Year 2022 Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Bill Wilson, Senior Director of Corporate Development. Thank you, sir. You may begin.

Thank you, Christine. Good morning, everyone, and welcome to the Matthews International Second Quarter Fiscal Year 2022 Earnings Conference Call. This is Bill Wilson, Senior Director of Corporate Development. With me today are Joe Bartolacci, President and Chief Executive Officer; and Steve Nicola, our Chief Financial Officer.

Before we start, I would like to remind you that our earnings release was posted on our 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.

In addition, as a reminder, beginning in the first quarter of fiscal 2022, the company transferred its Surfaces and engineered products businesses from the SGK Brand Solutions segment to the Industrial Technologies segment. Prior period results reflect the new segmentation.

As a reminder, 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 periodic 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.

And now I'll turn the call over to Steve.

Thank you, Bill. Good morning. In reviewing our results for the fiscal 2022 second quarter, some of the key highlights included: first, we reported a new record for quarterly sales and another consecutive quarter of year-over-year consolidated sales growth. Consolidated sales increased to $445 million for the current quarter compared to $417.2 million a year ago, representing an increase of $27.8 million or 6.7%. Each of our business segments reported sales growth for the quarter.

Second, the company's Industrial Technology segment, which includes the Energy Solutions, Warehouse Automation and Product Identification businesses, reported sales of $78.2 million for the fiscal 2022 second quarter compared to $65.3 million last year, representing an increase of $12.9 million or almost 20%. Adjusted EBITDA for this segment grew to $14.4 million compared to $8.3 million last year. These increases were mainly driven by continued growth in our Energy Solutions business, and higher Warehouse Automation and Product Identification sales.

Third, with respect to consolidated adjusted EBITDA, the benefit of higher consolidated sales was significantly mitigated by the unfavorable impact of increased material costs as well as other inflationary impacts, including increased labor and freight costs.

Fourth, the company reported an $83.1 million reduction in the outstanding debt balance during the fiscal 2022 second quarter. As a result, the company's net debt, which represents debt less cash, was below $700 million as of March 31, 2022. During the quarter, the company replaced its existing receivable securitization facility with a receivables purchase agreement. This resulted in $75 million reduction in trade receivables and debt.

Next, I'll provide a summary of our key earnings metrics on a GAAP and non-GAAP adjusted basis for the quarter ended March 31, 2022. On a GAAP basis, the company reported a net loss of $1.9 million or $0.06 per share compared to net income of $5 million or $0.16 per share for the same quarter last year. GAAP earnings for the current quarter included asset write-downs totaling $10.5 million related to the Russia, Ukraine conflict. In addition, both periods reflected the impacts of intangible amortization expense, primarily from the acceleration of amortization of certain intangible assets in the SGK Brand Solutions segment. Consolidated intangible amortization expense was $12 million or $0.28 per share for the fiscal 2022 second quarter compared to $22.9 million or $0.52 per share a year ago.

On a non-GAAP basis, adjusted EBITDA, which represents net income before interest expense, income taxes, depreciation and amortization and other adjustments, for the fiscal 2022 second quarter was $55.2 million compared to $60.9 million last year. The benefit of the company's consolidated sales growth was offset for the quarter primarily by higher material costs and increased labor and freight costs. In addition, the current quarter was impacted by unfavorable sales mix in the SGK Brand Solutions segment.

Adjusted earnings per share was $0.74 for the current quarter compared to $0.89 last year, primarily reflecting the reduction in adjusted EBITDA. Please see the reconciliations of adjusted EBITDA and non-GAAP adjusted earnings per share in our earnings release. For the 6 months ended March 31, 2022, consolidated sales increased to $883.6 million, compared to $803.8 million a year ago, representing an increase of $79.7 million or almost 10%.

Similar to the results for the second quarter, each of our business segments reported sales growth on a year-to-date basis. On a GAAP basis, the company reported a year-to-date net loss of $21.7 million or $0.68 per share compared to net income of $3.2 million or $0.10 per share last year. GAAP earnings for the current year included non-service pension costs of $31.4 million, which is predominantly related to the settlement of the company's principal pension plan.

In addition, as I noted earlier, the second quarter of this year included asset write-downs totaling $10.5 million related to the Russia, Ukraine conflict. Both year-to-date periods reflected the impact of accelerated intangible amortization expense. Consolidated intangible amortization expense was $33.5 million or $0.79 per share for the first 6 months of fiscal 2022 compared to $38.2 million or $0.88 per share a year ago.

On a non-GAAP basis, adjusted EBITDA for the 6 months ended March 31, 2022, was $108.5 million compared to $115.7 million last year. The benefit of the company's consolidated sales growth was offset primarily by higher material costs and increased labor and freight costs. In addition, the current year was impacted by unfavorable sales mix in the SGK Brand Solutions segment. Year-to-date adjusted earnings per share was $1.48 as of March 31, 2022, compared to $1.57 last year, primarily reflecting the reduction in adjusted EBITDA. The decline was partially offset by lower interest expense in the current year.

Investment income for the quarter ended March 31, 2022, was a loss of $327,000 compared to income of $1 million for the same quarter a year ago. Investment income for the 6 months ended March 31, 2022, was $676,000 compared to $2 million last year. Investment income primarily reflects the changes in the value of investments held in trust for certain of the company's benefit plans.

Interest expense for the fiscal 2022 second quarter was $6.3 million compared to $7.2 million a year ago. Year-to-date interest expense was $12.8 million for fiscal 2022 compared to $15 million last year. The declines reflected lower average debt levels and lower average interest rates for the current year. Other income and deductions net for the quarter ended March 31, 2022, represent pretax income of $562,000 compared with net expense of $2.6 million a year ago. The significant change primarily reflected a reduction in non-service pension costs as a result of the company's settlement of its principal pension plan.

Year-to-date, other income and deductions net for fiscal 2022 represented net expense of $31.2 million compared to net expense of $4.3 million last year. The year-to-date change primarily reflected a significant first quarter charge in the current year as a result of the settlement of the company's principal pension plan. Other income and deductions include the non-service portion of pension and post-retirement costs as well as banking-related fees and the impact of currency revaluation gains and losses on foreign denominated cash and debt balances.

The company's consolidated income taxes for the quarter ended March 31, 2022, were $3.3 million compared to $972,000 a year ago. The significant increase for the current quarter primarily reflected the impact of the non-deductible asset write-downs related to the Russia, Ukraine conflict. For the 6 months ended March 31, 2022, the company's consolidated income taxes reflected a benefit of $3.4 million compared to expense of $5 million last year. The benefit for the current year primarily reflected the tax benefit of the first quarter pension costs.

Please turn to Slide 5 to begin a review of our segment results. Sales for the Industrial Technologies segment were $78.2 million for the fiscal 2022 second quarter compared to $65.3 million a year ago, representing an increase of $12.9 million or approximately 20%. The growth resulted primarily from higher sales for the energy storage solutions business. In addition, Warehouse Automation and Product Identification sales improved for the quarter.

Backlog and incoming order rates for these businesses continue to be strong through the fiscal 2022 second quarter. Year-to-date, sales for the Industrial Technologies segment were $152.5 million through March 31, 2022, compared to $118.7 million a year ago, representing an increase of $33.8 million or approximately 28.5%. As a result of this sales growth, adjusted EBITDA for the Industrial Technologies segment was $14.4 million for the fiscal 2022 second quarter compared with $8.3 million a year ago. The increase also reflected improved margins and lower pension costs, which were partially offset by higher labor costs. On a year-to-date basis, adjusted EBITDA for the Industrial Technologies segment nearly doubled to $21.6 million compared with $11.3 million last year.

Please turn to Slide 6. Memorialization segment sales for the fiscal 2022 second quarter were $220 million compared to $205.5 million a year ago, representing an increase of $14.5 million or 7.1%. The growth was primarily the result of higher cemetery memorial product sales and increased prices. Casket unit sales volumes were slightly lower for the current quarter as the impact of COVID-19 begins to subside. The company also completed an acquisition of a small Cemetery Products business during the fiscal 2021 second quarter.

For the first 6 months of fiscal 2022, Memorialization segment sales were $430.7 million compared to $388.7 million a year ago, representing an increase of $42 million or 10.8%. Higher unit volumes of caskets and cemetery memorial products in addition to increased prices, were the primary drivers to the year-to-date sales improvement. Memorialization segment adjusted EBITDA for the fiscal 2022 second quarter was $42.9 million compared to $51.6 million a year ago. The favorable effect of higher sales was offset by the significant unfavorable impacts of higher material costs, mainly steel, lumber and bronze, compared to a year ago, as well as increased labor and freight costs. Memorialization segment adjusted EBITDA for the 6 months ended March 31, 2022 was $86.3 million compared to $95.7 million last year.

Please turn to Slide 7. Sales for the SGK Brand Solutions segment improved to $146.8 million for the quarter ended March 31, 2022 compared to $146.4 million a year ago. The increase primarily reflected higher merchandising-related sales and growth in the segment's European packaging business. These increases were significantly offset by changes in foreign currency rates, which had an unfavorable impact of $7 million on the segment's current quarter sales compared with the same quarter last year.

Year-to-date sales for the SGK Brand Solutions segment were $300.4 million for fiscal 2022 compared to $296.4 million last year. Similar to the second quarter, sales growth for our merchandising business and our brand packaging business in Asia, was significantly offset by unfavorable currency rate changes. These changes had an unfavorable -- favorable impact of $9.4 million on the segment's current year sales compared to last year.

Fiscal 2022 second quarter adjusted EBITDA for the SGK Brand Solutions segment was $13.5 million compared to $18.4 million a year ago. The decline primarily reflected the impact of an unfavorable change in sales mix from a year ago, increased labor costs, new client onboarding costs and higher travel and entertainment expenses. The segment sales mix for the current quarter reflected a reduction in higher margin agency and photography related sales, which were offset by increased merchandising sales. In addition, production inefficiencies related to remote work environment, impacted operating margins for the quarter. Adjusted EBITDA for the SGK Brand Solutions segment was $28.9 million for the first 6 months of fiscal 2022 compared to $40.2 million last year.

Please turn to Slide 8. Outstanding debt was $753 million at March 31, 2022, compared to $836.1 million at the end of the first quarter and $763.7 million at September 30, 2021. Net debt, which represented debt less cash at March 31, 2022, was $699.2 million, and our leverage rate -- net leverage ratio was 3.2. The leverage covenant ratio in our domestic credit facility is based on net debt. A significant portion of the debt reduction resulted from the replacement of our existing securitization facility, with the receivables purchase agreements that resulted in reductions in our debt and trade receivable balances.

With respect to our balance sheet, it is important to highlight that, since the beginning of the pandemic, the quarter ended March 31, 2020, we have reduced our outstanding debt balance by over $200 million, and our accrued pension balance by over $100 million. Cash flow provided by operating activities for the fiscal 2022 second quarter was almost $100 million compared to $56.9 million a year ago. The increase primarily reflected the sale of trade receivables totaling $75 million, under the company's new receivables purchase agreement that I just noted.

Cash flow provided by operating activities for the 6 months ended March 31, 2022, was $72.7 million compared to $92.2 million last year. This change included the contribution to the company's principal pension plan during the fiscal 2022 first quarter, in connection with the planned termination and settlements.

Approximately 31.3 million shares were outstanding at March 31, 2022. During the recent quarter, the company purchased approximately 289,000 shares under its share repurchase program. At March 31, 2022, the company had remaining authorization of approximately 2.3 million shares under the program.

Finally, the board yesterday declared a dividend of $0.22 per share on the company's common stock. The dividend is payable May 23, 2022, to stockholders of record May 9, 2022.

This concludes the financial review, and Joe will now comment on our company's operations.

Thank you, Steve. Good morning. We are pleased with our second quarter financial results despite the obvious challenges. Continued supply chain challenges, negative currency movement, rapidly rising costs and the war in Ukraine, combined to make an otherwise strong quarter more challenging than most. Despite those challenges, we delivered good results overall and exceptionally strong results in several of our businesses.

Each of our segments reported higher revenue than prior year, allowing us to report another record revenue for the quarter. Our revenue growth was both volume and price driven, as all businesses have raised prices to mitigate the inflationary pressures. Though, as you all know, the timing of our price increases doesn't always match up with the increases in our costs, the price increases in the Memorialization segment will help mitigate the declining volumes resulting from the lower COVID-related deaths.

Again, this quarter, I want to highlight the particularly strong performance in our recast Industrial Technologies segment which reported almost 20% revenue growth and almost a 75% increase in EBITDA versus prior year. Although our energy storage business was the largest driver of this performance, our Warehouse Automation and our Product Identification business continued their strong performance, and also delivered significant year-over-year improvement as well. As you are aware, this segment represents our fastest-growing businesses. We expect these businesses to have an exceptional year with revenues on track to approach $300 million, as our backlog in this segment alone still remained over $200 million.

Interest in our energy storage business remains strong, particularly in our proprietary dry electrode technology. We are in continuing discussions with some of the world's largest auto industry participants who are seeking us out due to our demonstrated ability to produce dry electrode production level equipment. We believe that dry electrode battery production will be the next generation of batteries to enter the market for many reasons. But most importantly, dry electrodes offer a significantly lower capital cost and a smaller footprint to produce versus wet electrodes. We are very well positioned in this market with almost a decade of experience, know-how and intellectual property.

Our Memorialization segment continued strong top line performance, particularly in Cemetery and Funeral products, was offset by rising commodity, labor and freight costs. Although this business has raised prices significantly, further action may be necessary in the future to mitigate costs, like higher labor, which are becoming a more permanent part of our cost structure.

In SGK, the team continues to deliver top line organic growth, but was challenged by currency changes during the quarter. In addition to currency, EBITDA was impacted by significant product mix shifts and inflationary pressures affecting both our businesses and those of our most important consumer product companies. As I'm sure you've heard this earnings season, several CPG clients have softened marketing spend, resulting in lower volume for SGK, as they look to offset the rising commodity costs in their own businesses. SGK also implemented by pricing actions to offset the rising cost of labor.

During the quarter, we also took further action to reduce our debt, bringing our total debt reduction during the 2 years of the pandemic to over $200 million. Further, as I stated last quarter, we terminated our U.S. defined benefit plan and paid off the benefits to our retirees and employees. This reduced our pension plan since the start of the pandemic by over $100 million. In total, we have reduced total company obligations and debt by over $300 million to the benefit of our shareholders since the beginning of the pandemic.

We are satisfied with our operating performance for the quarter and confident in our ability to continue to deliver solid results. As we look to the balance of the year, there is still even more uncertainty than before. Inflationary pressures do not to be -- do not appear to be subsiding. The war in the Ukraine is causing concerns throughout Europe, where we have significant presence, particularly with SGK. Also, significant changes in currency rates are impacting our expectations for the balance of the year. All of these factors and more, make predicting our performance in the balance of the year very difficult.

Despite these challenges, our current estimates remain strong, thanks to our strong backlogs in many of our businesses, and the pricing actions taken to date. As a result, we continue to believe that we can deliver at least $220 million of EBITDA on a full year basis. If not for some of the uncertainties that we see, including the currency fluctuations, we would expect even better results. But for now, this is our best estimate.

Now let's open it up for questions.

(Operator Instructions) Our first question comes from the line of Daniel Moore with CJS Securities.

Let me start with Industrial Technologies where margins were -- clearly stand out. Maybe talk about some of the drivers there. Obviously, mix was favorable to some extent. But if you could kind of dig in a little bit more and just talk about the sustainability of the margins you generated in this quarter.

So I mean as we look -- as I said in my comments that each one of the businesses performed well and had significant improvement on a year-over-year basis. Volume drives our performance on the bottom line. We're expecting all of those businesses to pretty much sustain that kind of profitability, and the kind of performance we've talked about for the quarter for the balance of the year. My comments that we're going to be approaching $300 million in this segment, and almost $60 million of EBITDA, we've been talking about this for several years. And I think we're just at the beginning. These results do not even include our new product, which we are very, very confident about, in our Product Identification business, that comes in the market at the end of this calendar year.

And then maybe switching to Memorialization. I think you said Funeral Home Products volumes were down slightly, not a surprise, obviously, given the extremely difficult comp. Just trying to get a sense of how quickly volumes are returning to more normal levels on that side of the Memorialization business.

Yes. Part -- I mean the volumes are already coming back down to normal. They've been there for about a month now at this point, or better than a month at least. The issue that I think the street maybe misunderstanding is that the pricing actions that we've taken to date really are going to mitigate, if not offset completely, those pricing -- those volume reductions. That together with extremely strong backlogs in our Cemetery Products business, we're expecting another strong year in that segment this year as well.

And then the follow-up to that is just in terms of the lag in terms -- as far as pricing versus the inflationary pressures? How long do you -- when do we expect to see margins maybe start to trend back to more normal levels in that business? And then I'll jump back in queue.

I would expect that some -- we've had some pricing action taken throughout the second quarter that only benefited a part of the quarter. We'll see some of that benefit going further into this quarter, getting better. And given where our cost structures are, we would expect to see further pricing actions throughout the year. So I would tell you -- whatever normal may be in your mind in terms of margins, I would tell you that we'll start to see that more towards the latter part of the year as we move forward, but the volumes will remain elevated. I mean the revenues remain elevated, excuse me.

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

Joe, could you talk a bit about cremation systems in the Memorialization segment? It wasn't mentioned in any of your comments. How are the sales and how does the backlog look there?

So when we talk about our human cremation units, we are strong. I mean our order rates remain strong and elevated orders. We're having some difficulty in the supply chain side of things, getting things out. But we expect that to be a good contributor over the balance of the year and into next year as well.

And what assets had to be written down as a result of the Ukraine conflict?

Yes, Liam, I'll take that one. We have a facility in Russia that serves primarily the tobacco market in Russia, in our SGK business.

And I'm presuming it's uncertain how that's going to shake out?

Yes. We've taken action to eliminate that at this point in time. Obviously, the facility is still there. Whether it ever comes back online or not is another story.

Well, I guess my question is, can you work around that write-down? I mean it's pretty sudden for you. Who knows, [well, if you’re on it]. (inaudible).

Yes. Well, I mean, obviously, the tobacco companies still exist, and they were producing product for other parts of Europe from there as well. We expect that that volume will just be shifted to other locations. But there has been disruption.

Our next question comes from the line of Chris McGinnis with Sidoti.

If you could just start maybe with the inflationary environment related to lithium. Could you just talk about -- is that helping drive more customers to seek you out and your option out? Can you just talk a little bit about that dynamic?

Sure. I mean, I would -- we don't -- as you know, Chris, we don't produce the battery. So anything I'm going to give you in terms of feedback with respect to that is going to be anecdotal or related. But obviously, anything that would reduce the overall cost of producing a lithium-ion battery, is going to be viewed favorably in an environment where the overall cost of the raw materials are going up. Our solution, the dry electrode solution, amongst the other benefits, clearly is a lower cost of production. And that's going to drive it, as lithium continues to go up, and as well as other raw materials associated with the production of the battery goes up. All manufacturers will be looking for lower cost to produce, and this is the solution. So we think it's favorable for us.

And I guess this conversation since last quarter to this quarter, has it increased or stayed the same? I mean can you just give a little bit of color around that?

Yes. Chris, we are actively talking to a dozen or more auto players, and that includes the actual auto manufacturers as well as OEM part manufacturers. So those discussions continue on. I would tell you, we have interest both in our wet electrode capabilities as well as our dry. There is some timing issues as to when those would actually come online. We continue to sell lab machines, which are the precursors to production machines, as people try to formulate their own solutions for their own batteries. So discussions continue extremely strong. A lot of interest in us, and a few trade shows that we've attended. And obviously, we still remain very, very bullish on where this goes. Is it a direct line up? Probably not. Is it a -- what I would consider a long-term -- a mid-term? Very, very successful and interesting business you bet.

Just a couple of more questions around Industrial. Just with automation, are you running any supply chain issues in getting product? I was talking to a company yesterday where it's over a year out to get some of the equipment. Can you just talk about the ramp of that business and the expectation there going forward?

Yes. There clearly is supply chain issues. As we look at our warehouse automation part of it, obviously, there -- we sell software and some hardware into the warehouse automation business for companies around the country. I would not tell you that we have significant issues in that business as much as our suppliers -- excuse me, our customers, whether it be conveyors, sorters, whatever it may be, the hardware that they are trying to get their hands on, which is what we overlay our software on, has been challenging. So it has delayed some installations and caused us challenging to get to recognize revenue on product. We have backlog that we have. We have a very, very strong backlog in that business as well.

When it comes to Product Identification, the team is struggling with what I would call componentry, whether it be the vapors that we used to produce our new product, whether it's -- or the circuit boards used to produce the drivers of those products, we are having some challenges, but they've done a pretty good job of substituting and finding alternative solutions. Is it perfect? No. It is hampering us. But that is also what's causing the over $200 million of backlog in that segment that you see today.

And then one just last one on the Product Identification. Can you -- I mean, is that -- you feel -- it sounds really confident that next year is going to be a big year for you. Can you just talk about the stage of where you're at with the customer? Are they starting to receive it? Can you just provide a little bit more color on identification?

So I would tell you, we are in beta plus with respect to our new product. It's -- the product has been out there for months. It is performing exactly as we expected, in some cases better. Our movement from what I would call lab production of the silicon chip is going well. We're moving that production line to a Teledyne fab lab. That fab lab has been very, very, very instrumental for us to understand what our ongoing capabilities are in terms of cost structure, effectiveness and volumes. And we remain bullish. I mean is it going to be -- again, we caution that this is not going to be like we're going to launch it tomorrow, we're going to overtake the world, but the value proposition we have expected is coming through.

And then, Steve, question for you just around the inflationary environment and then FX. Maybe can you just talk about the impact, maybe FX on EBITDA in the quarter? And then just kind of maybe the outlook in general?

Sure. Yes. The impact on EBITDA for the quarter is I'd say somewhere around the $2 million to $3 million range in total. But from a revenue perspective, on a consolidated basis, it was over $11 million. So it certainly had a top line impact, Chris. And as I mentioned before, the impact of the SGK segment, particularly because when you look at the absolute reported growth in their top line, it reports very small. But you have to keep in mind that there was a $7 million top line headwind in that business that masked some growth, particularly on the merchandising side of that business.

And Chris, I'm sorry, the second part of your question?

What was just, I guess, the impact when you look at your guidance going out there as well? I mean it feels like it would have been a little bit stronger, if not, given the inflation and then also obviously, the FX.

Yes, there's no question about that. I mean, from a bottom line standpoint, our results would have been significantly better, but for the inflation. On a top line standpoint, the interesting thing about that we saw, as Steve said, $11 million plus or minus on a currency fluctuation, largely impacting the SGK side of the business. What is disappointing in that, it reflects what we've been talking about for a while, which has been some client wins that are ramping up as we speak, that would otherwise -- being masked by the currency changes we're seeing. We don't know where it's going. I can tell you -- today is what, the 29th of April and euro has further degradated from where it was before. Where that finishes out the year, it's difficult to tell. So we're not in the currency business, but it's not helpful.

Our next question comes from the line of Justin Bergner with Gabelli Funds.

Apologies, I got on the call a little late, so I may ask questions on areas you've covered. But just to clarify, I guess, the last line of questioning. So the currency impact was $11 million in terms of revenue and $2 million to $3 million EBITDA?

Yes. That’s correct.

You mentioned inflation, I wasn't sure... Okay.

Okay. No, inflation -- I mean, let's put it this way. When we set it in inflation, obviously, inflation is impacting our bottom line more than we had anticipated. And -- but our pricing action is not fully implemented just yet.

Okay. But the actual $11 million, $2 million to $3 million that was currency, that was not…

Yes. That's hard. Yes. That’s a hard number.

If that's correct?

Inflation is much higher than that, I expect.

I guess, secondly, just in the SGK business, could you just -- if you haven't already, maybe just talk through what's strong and what's challenged in that business looking into the second half?

Yes. So we have seen some of the largest CPGs that you would know, cut back on our marketing spend, principally in North America and in Europe, and as a result of trying to offset their rising commodity costs. I mean that's just the reality. They're finding ways to maintain their bottom line. And what they're doing is cutting that cost. And that's the challenge we saw this quarter, in particular. Going forward, it's hard to tell whether that does -- this is not -- this cannot be a permanent situation for them. We think marketing just is an evolutionary time, it goes back and forth.

But we are seeing strong retail experience. I mean, as we said, the reopening trade is coming back. We hope that will continue throughout the balance of the year. We're also seeing a recovery in our private label business, as we start to see retailers again, mostly grocers, get their supply chain in order and begin to refocus on rebranding or remarketing their product on the shelf. So we're expecting -- so the short story is difficult to tell with the CPGs. We expect that comes back. Is it next quarter or the quarter after that, it's difficult. But it does come back. And -- but we're expecting stronger results as we've seen in our brand – in our merchandising, brand experience business as well as our private label business than we had prior year.

And when you talk about merchandising, that's synonymous with retail, just…

Yes. It is retail. There's -- we look at retail in 2 forms; private label, which is the product on the shelf that's owned by the retailer, as well as in-store marketing and experiences, things like we do some work for some relatively large brands that are in-store displays and marketing efforts inside the store.

And then you did $108.5 million to EBITDA in the first half. Your guide is still better than $220 million. So it seems like you have some headwinds in the second half, in parts of your business. Maybe just -- what gets better to offset those headwinds and deliver a second half that's slightly better than the first half?

So if you would have asked me that question probably in January of this year, we would have told you it'd be a little better than that. But currency has moved the wrong way. So we don't know where currency ends up for the balance of the year. And we need some confirmation that we are able to deliver some of the large products on the energy side within the balance of the second half. That is not in our control, whether they are facilities that are being built. Our customer readiness to accept product has been one of the biggest challenges we have, whether it be on energy, whether it be on warehouse, whether it be in some of the cremation situations that we have. Our customer readiness is a precursor to recognizing revenue for us that we haven't been able to get it all.

One or 2 more questions, if I may. The step-up in sequential margins in your Industrial Technologies business, clearly, you alluded to that as part of, I think, your annual outlook in some prior comments. But was that expected? What triggered that? Is that sort of stable there?

As expected -- here is the best way to frame it. It kind of relates to the last question you asked. It is expected, and we hope that it is sustainable. The issue is really not so much up. It's the timing of customer readiness. I mean, as I said before, we have very strong backlogs in our Warehouse Automation business, where the issue is really, the warehouse is ready to accept software. We're the last -- usually the last player into a new warehouse or a reconfigured warehouse. So we overlay our software over the underlying hardware, but the hardware has to get there first. So it's -- those are the kinds of challenges we're facing that are -- really don't look to the quality of the business or the kind of revenues -- excuse me, kind of profitability we expect. It's timing.

So it seems like there was a favorable mix impact then in the EBITDA margin for this quarter, but not unexpected?

Yes. I mean -- and let me -- I assure you that the entire business has been significantly better than what I would call greater-than-expected inflationary pressures.

And then lastly, you talked about, I think, securitizing some receivables. I'm assuming those went off balance sheet. Is that the correct interpretation? And can you share that number? Should I just wait for the queue.

Justin, that's entirely correct. So in the past, we had -- or prior to this year, we had a receivable securitization facility in place. We've replaced that with a receivables purchase agreement, basically still debt secured by receivables, but it was -- had no -- has no cost impact to us. It's the same cost of that debt. The difference being, though, that -- you're right, it takes the receivables and related debt off balance sheet. And that reduction this quarter, that impact was $75 million.

Our next question is a follow-up from Daniel Moore with CJS Securities.

Just as a follow-up to that last one, as it relates to cash flow. Obviously, the EBITDA guide in the $220 million range is still the goal. How does that translate? How do you see that translating to cash flow from ops or free cash flow, inclusive or exclusive of the $75 million receivable that you just mentioned? Just trying to get a sense of your view for cash generation for the year.

So it's interesting this year, because when you look at the $220 million adjusted EBITDA number relative to a year ago, if that's your reference point for cash flow and the cash flow estimates, the receivable securitization actually serves to mitigate a couple of things. One, if you recall, we made a $35 plus million contribution to our pension plan in the first quarter. So that mitigates the impact of some of that on the balance sheet and reported debt. And secondly, as you've been seeing in our cash flow information first quarter this year, and as we've talked about, we are expecting a higher level of capital expenditures this year. So I would use those factors in modeling out the cash flow for the year.

We have no further questions at this time. Mr. Wilson, I would like to turn the floor back over to you for closing comments.

Thank you, Christine, and thank you for joining us today in the -- for your interest in Matthews. For additional information about the company and our financial results, please contact me or visit our website. Enjoy the rest of your day.

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.