July 30, 2019 - 11:47am EST by
2019 2020
Price: 34.65 EPS 0 0
Shares Out. (in M): 32 P/E 0 0
Market Cap (in $M): 1,093 P/FCF 0 0
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT 0 0
Borrow Cost: General Collateral

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We recommend shorting Matthew’s International (“MATW”).  MATW has been written up before on VIC, highlighting inconsistent accounting and an M&A program which obfuscates organic growth. While we agree with most elements of that short thesis and think MATW’s altered reporting in 1Q19 further strengthens its case, we believe there are additional, unappreciated elements that warrant an additional write-up. 


We focus our analysis on MATW’s two largest segments, SGK Brand Solutions (“SGK”) and Memorialization, where we believe street numbers are too high as focus shifts to 2020.

  •  At SGK, we see several headwinds preventing the segment from achieving the street’s 2020 inflection in both EBITDA margin and growth.
    • Industry headwinds highlighted by large consumer brands who have leveraged their scale and eliminated pricing power, struggles also displayed by MATW’s closest competitor sgsco.
    • A three-year Nutrition Facts Label tailwind set to disappear January 1, 2020.
    • Large EBITDA hole from the loss of a Nike contract which was significant in both size and margin.


  • In Memorialization, consumer preferences have shifted from traditional burial to cremation.  These trends have recently accelerated and put incremental volume pressure on the industry.
    • MATW has held margins in the segment due to realized synergies from its Aurora acquisition. We view these synergies as substantially complete.
    • Hillenbrand (NYSE: HI), #1 market share in caskets, has communicated concerns for this segment.  Based on current guidance, HI will have seen its casket margins decline by ~400bps in the last two years.  We do not see a good reason for MATW margins to exceed those of HI.
  • Combined, these issues point to a significant 2020 EBITDA decline from current levels.  In a base case of $100m of FCF utilized for debt paydown, we do not believe MATW will be able to reduce leverage in the next 18 months.  In addition to concerns around current leverage (3.8x TTM as of 2Q19), this also makes it difficult for MATW to pursue acquisitions.



SGK Brand Solutions operates a global business serving large multinational companies and regional businesses in a longstanding duopoly with sgsco (f/k/a SGS International, owned by Onex since 2012).   SGK offers a vertical printing solution to large brands like Pepsi, Lilly, Kroger etc. Depending on the depth of the relationship, MATW will provide a brand creative design and serve as an outsourced ad agency, sometimes with employees on site.  MATW is responsible for managing the process of applying brand designs to each unique SKU and administering the print to each package. The value proposition is consistency across all mediums to ensure brand integrity. MATW management has recently discussed growth drivers for SGK including private label penetration and brand/SKU proliferation with CPG customers. 



The tailwind from these drivers is apparent in SGK’s historical results, but incremental benefits going forward are less clear.  Despite operating in a duopoly with sgsco, the industry appears to have lost pricing power. As consumer brand companies dealt with their own issues, they have increasingly leveraged their scale to demand more work for the same price, a trend that is visible in the negative organic growth in three of the past four quarters. We think the market is overlooking a few other items which should impact future results, particularly in 2020.


In 2016, the FDA implemented new requirements for its Nutrition Facts Label that drove business as customers sought to comply with the new rules.  Originally, manufacturers producing more than $10 million in revenue were required to make the change by July 2018. The timetable was subsequently pushed to January 1, 2020 under the new administration.  Many food manufacturers got ahead of the original date and there has been a steady migration leading up to the final deadline. By our estimates, this label change represents a one-time revenue lift of ~20%, which should evaporate in 2020.


Another issue is the loss of Nike.  In October 2018, Nike decided to move its photography business in house, this was disclosed by MATW on its 4Q18 earnings call and should be a headwind for the balance of 2019.  Annualizing the $7m impact cited by management on the last conference call, it appears the contract was ~$25-30m in revenue and we estimate significantly higher than average segment margins. 


From 2Q19 Earnings Call Transcript 5-3-2019:


Our assumptions for the Nike contribution imply SGK’s EBITDA margin would have been ~100bps lower than reported in FY2018 or below 18% without this contract.  Two things make this EBITDA hole difficult to fill: (i) traditional CPG contracts (where most growth appears to coming from) are lower margin and (ii) the vast majority of contracts are materially smaller than $25-30m in revenue (at Investor Day, management indicated Nike was a “huge” contract). 


From June 2019 Investor Day Transcript 6-24-2019:


Finally, chief competitor sgsco’s recent performance points to changing industry dynamics.  Since Onex purchased sgsco in 2012, there has been significant c-suite turnover (February 2019 CEO exit - & several CFOs). In 2018, Onex took an impairment charge on sgsco due to lower sales in the United States.  Additionally, sgsco’s fundamentals have deteriorated (see exhibit below). sgsco has seen EBITDA fall dramatically while taking on incremental debt to pursue M&A.  We question if MATW can maintain SGK EBITDA without pursuing M&A in the face of intensifying industry headwinds.



These headwinds make it hard for us to see a path to 2020 street estimates, particularly a recovery to 19.5% EBITDA margins.  The cost of doing business should continue to rise as more complex work is required for the same revenue while upfront contract investment rises.  Long term, margins for this business should see continued headwinds. Additionally, we believe the street is underestimating the difficulty of 4Q18’s 300bps+ margin comp (see 4Q18 transcript below. Note EBITDA reporting changed 1Q19, corporate now reported separately). 


From 4Q18 Earnings Call Transcript 11-16-2018:



MATW’s Memorialization business consists of three segments: (i) Caskets, (ii) Bronze & Granite Memorials, and (iii) Cremation Equipment Services (see chart below for scale).  This segment has benefited from opaque casket and funeral pricing for decades but as price transparency has improved, casket prices have become pressured. The continued shift in consumer preference away from traditional burial to cremation creates another long-term headwind.  We question volume growth in the face of these trends, which likely explains MATW’s historical focus on M&A. 



While MATW has had a difficult 2019, we believe the recent Investor Day highlighted additional downside opportunities. First, MATW acquired Aurora Casket Co. in August 2015, and has long touted the potential synergies.  We believe that after four years, duplicative plants have been closed and what synergies remain are immaterial. Longer term, we see Memorialization segment EBITDA margins trending toward Hillenbrand’s or below. Hillenbrand (HI) has the #1 market share in caskets with ~40% compared to MATW slightly under 30%.  HI has guided its Batesville division (caskets) to 21% EBITDA margin for 2019. We see no reason MATW’s Memorialization margins should not retreat from 23% to 21% or lower as Aurora synergies are no longer able to offset continued industry volume loss. For perspective, 90% of HI’s Batesville division is casket revenue which has seen ~400bps of margin compression and a 20% decline in EBITDA in the last 2 years (assuming 2019 margin guidance of 21%).  Additionally, MATW is lapping the February 2018 acquisition of Star Granite which should create a further headwind to revenue growth in 3Q19. 



From 4Q18 Earnings Call Transcript 11-16-18:


Putting it all together:

The Street’s expectation for a sharp inflection in 2020 margins appears unrealistic given the details we have outlined in MATW’s two largest segments.  Fundamentals are moving in the wrong direction, limiting MATW’s ability to de-lever or pursue additional M&A. We have chosen not to discuss earnings quality given the previous write-ups, but agree with many of their conclusions as well. 


If results fail to meet expectations, MATW’s inexpensive headline valuation may look suspect. 

  • In the past two years, HI’s Batesville division has seen EBITDA decline by 20%, assuming 2019 guidance of -1% to -3% topline and 21% EBITDA margin.  We do not believe MATW is immune to industry volume issues. 
  • Since sgsco was acquired by Onex in 2012, EBITDA has only grown 4% despite multiple acquisitions.  We see the street’s 13%+ 2020 EBITDA growth rate as unrealistic.