Hillenbrand Q2 2024 Earnings Call Transcript

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May 1, 2024

There are 5 speakers on the call.

Operator

Greetings. Welcome to Hillenbrand's Second Quarter Fiscal Year 20 24 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded.

Operator

At this time, I'll turn the conference over to Sam Meinsburg, Vice President of Investor Relations. Mr. Meinsburg, you may now begin your presentation.

Speaker 1

You, operator. Good morning, everyone. Welcome to Helen Brand's earnings call for our Q2 of fiscal year 2024. I'm joined by our President CEO, Tim Ryan

Speaker 2

and our

Speaker 1

Senior Vice President and CFO, Bob Van Himbergen. I'd like to direct your attention to the supplemental slides posted on our IR website that will be referenced on today's call. Turning to Slide 3, a reminder that our comments may contain certain forward looking statements that are subject to the Safe Harbor provisions of the securities laws. These statements are not guarantees of future performance and our actual results could differ materially. Also during the course of this call, we will be discussing certain non GAAP operating performance measures, including organic comparisons for our segments, which exclude the impacts from acquisitions, divestitures and foreign currency exchange rates.

Speaker 1

Also, we will be discussing our results on a continuing operations basis, which excludes the discontinued operations of Batesville, which we divested in February of last year. I encourage you to review the appendix on Slide 3 of the presentation as well as our 10 Q, which can be found on our website for a deeper discussion of non GAAP information, forward looking statements and the risk factors that could impact our actual results. With that, I'll now turn the call over to Kim.

Speaker 2

Thank you, Sam, and good morning, everyone. Thanks for joining us on today's call. We continue to operate in a challenging demand environment as global macroeconomic uncertainty continues to impact customer order decisions across many parts of our business. We'll discuss this further in our updated outlook for the remainder of 2024, but first I'll give a little more color on the dynamics we're seeing in our segments and the actions we're taking in response to the volume headwinds we're facing. Starting with the quarter, we had total revenue growth of 14%, driven by the acquisition of Schenck Processed Food and Performance Materials Business or FTM, and we delivered adjusted earnings per share of $0.76 which was in line with our expectations.

Speaker 2

However, while order rates improved sequentially in both segments, they did not re ground to the levels we expected coming into the year. In our Advanced Process Solutions segment, we continue to see strong aftermarket performance and solid demand from our polyolefin customers, where the investment cycle has remained resilient and our technological capabilities allowing for the highest output and quality gives us a strong competitive advantage. However, this was offset by lower than expected orders for midsized capital projects in other end markets. Order pipelines remain robust and utilization at our test facilities remains high. However, final customer decisions continue to be slower than expected, which is negatively impacting the segment's top line for the year.

Speaker 2

In response, we began implementing cost actions during the quarter, including targeted restructuring and strict limitations on hiring, travel and other discretionary costs. I'm pleased with the urgency in which the teams have been implementing these actions, which continue to contribute to the 100 basis points of adjusted EBITDA margin expansion that we saw in the quarter. While we anticipate some of these costs will come back, we'll be disciplined until we see orders returning to expected levels. Additionally, we continue to make good progress leveraging the Hillenbrand operating model to integrate FTM and Linksys, And we're pleased with the traction that we're getting on margin expansion in these businesses, which is tracking ahead of schedule. We've seen a few larger projects get delayed to later in the fiscal year or early fiscal 2025, which puts some pressure on near term volumes.

Speaker 2

Nevertheless, we remain highly confident in the opportunities we see for these businesses to drive long term growth and value for Hillenbrand. Turning to our Molding Technologies segment, we're pleased to see orders improve over 10% sequentially, but we've yet to see a clear inflection point in the demand environment as orders in the quarter were relatively consistent with what we experienced throughout last year. We remain cautiously optimistic that we've hit the trough, but do not expect a material recovery in fiscal 2024, which is reflected in our updated guidance that Bob will cover in more detail later in the call. Additionally, we continue to see pressure in our short cycle, high margin hot runner products, causing mix to be a headwind to our previously expected margin profile. As we announced last quarter, we've launched a restructuring program for the MTS segment.

Speaker 2

We've been working diligently on the execution of this program and increased its scope to include an additional facility consolidation, which we executed in March. This is reflected in the $25,000,000 charge we took this quarter, which was higher than the $20,000,000 charge we had previously announced. We also expect an increase in the annual run rate savings associated with the program to be approximately $20,000,000 up from our previous estimate of $15,000,000 We believe these actions are appropriate and necessary given the prolonged demand softness, and we're confident that we'll be well positioned to return to higher levels of growth and profitability once demand recovers. Since completing the strategic acquisitions that enabled our transformation, debt reduction has been our number one priority in terms of capital allocation. Sustained order delays have continued to negatively impact our cash flow and put pressure on our deleveraging timeline in the near term, but our priorities have not changed.

Speaker 2

We're confident that ongoing working capital optimization initiatives, together with the implemented cost controls, will drive stronger back half performance as we move forward. Across the enterprise, we've charged ourselves and our global teams to take the necessary actions to position the business for success. We remain energized by our portfolio transformation and believe the secular trends that underpin our key end markets will perform as anticipated over the long term and that our enhanced technological capabilities, engineering expertise and global reach will allow us to drive differentiated performance in these markets. With that, I'll now turn the call over to Bob to provide more detail on our financial performance and outlook.

Speaker 1

Thanks, Kim, and good morning, everyone. Turning to our consolidated performance on Slide 5. We delivered revenue of $785,000,000 an increase of 14% compared to the prior year due to the acquisition of FPM. On an organic basis, revenues decreased 5% year over year as higher aftermarket revenue and pricing were more than offset by lower capital equipment volume led by a decrease in MPS. Adjusted EBITDA of $123,000,000 increased 13%, but decreased 7% organically, as pricing, cost containment actions and product mix were more than offset by cost inflation and lower MTS volume.

Speaker 1

We delivered consolidated adjusted EBITDA margin of 15.6%, which was essentially flat to the prior year. We reported GAAP net income of $6,000,000 or $0.09 per share, down $0.24 from the prior year, as the impact of the FPM acquisition, lower tax expense, pricing and cost containment were more than offset by an increase in restructuring costs, cost inflation, lower organic volume and higher interest expense. Adjusted earnings per share of $0.76 increased 0 point 0 $2 or 3%. Our adjusted effective tax rate in the quarter was 28.1%, which was in line with our expectations. Our cash flow from operations was $3,000,000 in the quarter, down approximately $47,000,000 from the prior year and below our expectations, primarily due to the timing of working capital requirements on large projects and lower customer advances.

Speaker 1

We continue to deploy the Hillenbrand operating model to drive working capital efficiency around trade receivables, payables and inventory, where we saw an improvement as a percentage of sales of over 3 50 basis points year over year, as well as sequential improvement. However, as a result of lower volumes and lower customer advances, we now expect our free cash flow for the full year to be in the range of $130,000,000 to $150,000,000 versus our previous expectation of roughly $230,000,000 Now moving to segment performance, starting on APS on Slide 6. Revenue of $559,000,000 increased 30% compared to the prior year, driven by FBM. Organic revenue was flat year over year as higher aftermarket volume and pricing were offset by lower capital equipment volume, particularly in mid sized systems. Adjusted EBITDA of $101,000,000 increased 38% year over year and was up 7% organically, primarily driven by favorable price cost and cost containment, partially offset by lower capital equipment volume.

Speaker 1

We delivered adjusted EBITDA margin in the quarter of 18%, which was up 100 basis points over the prior year, primarily due to cost containment, favorable product mix and progress on integration initiatives. Backlog of $1,900,000,000 increased 12% compared to the prior year, driven by FPM. On an organic basis, backlog decreased 5%. Sequentially, backlog was down 2%, but was flat excluding foreign exchange. Now turning to MTS on Slide 7.

Speaker 1

Revenue of $226,000,000 decreased 13% year over year, primarily driven by lower volume for injection molding equipment. While injection molding faced a tough comparable against the prior year, the revenue performance exceeded our expectations for the quarter as the teams did a good job accelerating project execution from backlog. But this was largely offset by softer than expected performance in our hot runner product line, largely due to softer demand in North America. Adjusted EBITDA of $34,000,000 decreased 29% due to lower volume and cost inflation, partially offset by cost containment. Adjusted EBITDA margin of 14.9 percent decreased 3.30 basis points compared to the prior year, largely driven by the impact of lower volumes on operating leverage and price cost pressure.

Speaker 1

In addition, identified isolated operating efficiencies in one of our hot runner facilities in North America. We've aggressively pursued cost actions during the quarter to help support back half profitability given these challenges. Backlog of $230,000,000 decreased 23% compared to the prior year, but was essentially flat on a sequential basis. As Kim mentioned, orders improved sequentially, but did not fully recover the shortfall we experienced in Q1. We saw bright spots of demand for injection molding equipment, particularly for automotive and packaging applications, but weakness in consumer goods and electronics weighed on our higher margin hot runner product line, particularly in North America, as I mentioned.

Speaker 1

Turning to Slide 8. Net debt at the end of the 2nd quarter was $1,880,000,000 and net debt to adjusted EBITDA ratio was 3.5 times. As net debt reduction remains our number one priority, we're disappointed with the modest increase in our leverage, which was slightly above our expectations due to the weaker cash flow and orders. Given these conditions, it will be a challenge to achieve our deleverage target of returning to within our net leverage guardrails of 1.7x to 2.7x by a previously stated goal of Q2 fiscal 2025. We'll continue to aggressively pursue cost actions and working capital efficiencies to further reduce leverage, but we'll have to revisit the timeline for turning to our guardrails once we have more visibility to order patterns normalizing.

Speaker 1

I'll now wrap up with our revised outlook for the remainder of 2024. As mentioned, order patterns in the quarter remained below our original expectations. We've yet to see material shift in underlying market conditions, and consequently, we're updating our outlook to reflect current demand trends. For full year 2024, we now expect total revenue for Hillenbrand of $3,200,000,000 to $3,300,000,000 previously $3,300,000,000 to 3,400,000,000 dollars Adjusted EBITDA is now expected to be in the range of $512,000,000 to $536,000,000 previously $530,000,000 to $588,000,000 Adjusted EPS is now expected to be $3.30 to $3.50 previously, $3.60 to $3.95 For EPS, the changes reflect lower volumes due to order timing and the impact of fixed cost leverage, partially offset by cost actions and accelerated margin performance within the recent acquisitions. In MTS, we're seeing unfavorable product mix, pricing pressure and isolated operating inefficiencies within our hot runner product line, partially offset by roughly $8,000,000 of in year MTS restructuring benefits.

Speaker 1

We're seeing better performance in our injection molding product line compared to our original expectations, given some larger orders that came through in Q2. But as a reminder, this comes in at a lower relative margin. Our higher margin hot runner product line remains softer than expected, particularly in North America. And as I mentioned, we're experiencing operating inefficiencies in one of our hot running facilities, which is putting additional pressure on margins. Through our restructuring and capacity optimization efforts, we're actively working to return to expected levels of efficiency, which we expect to start seeing in the Q4.

Speaker 1

For Q3, we are targeting adjusted earnings per share in the range of $0.80 to $0.85 reflecting moderately improved performance in both segments on a sequential basis. Please review Slide 9 for additional guidance assumptions. In summary, we recognize the headwinds we're facing and we're taking actions to enable the business to navigate this challenging environment. We will remain vigilant and pursue additional actions as necessary. At the same time, we remain excited about the opportunities for growth and margin expansion we see for the businesses over the long term.

Speaker 1

With that, I'll turn the call back over to Kim.

Speaker 2

Thanks, Bob. Before taking questions, I'll end our presentation this morning with a few final remarks. We acknowledge that orders continue to be softer and more cyclical throughout various parts of our business as headwinds have persisted beyond our initial expectations. As Bob discussed, our revised guidance range reflect the current market conditions and the expected trajectory of the businesses throughout the rest of the year. I have strong conviction that our internal initiatives and diligent execution will navigate us through the near term and that our strong brands and process technologies remain best in class in their ability to solve our customers' most complex processing needs anywhere in the world.

Speaker 2

Finally, as we announced a few weeks ago, we'll be featuring a number of our brands at next week's plastics trade show NPE in Orlando, Florida. As one of the largest plastics trade shows in the world, this is a great opportunity for us to engage with customers and highlight breadth of our capabilities and key innovations in supporting the critical elements of the plastics value chain, from pellet production to manufactured products to recycling. We'll be a leading member of the education sessions featuring industry experts within our business, as well as hosting the annual Circular Plastics Challenge again this year in partnership with Net Impact and Coca Cola, where teams from all around the world come together to promote innovation within the plastics industry, focused on sustainability and the circular economy. With that, we'll now open the line for your questions.

Operator

Thank you. We'll now be conducting a question and answer Thank you. And our first question today is from the line of Matt Summerville with D. A. Davidson.

Operator

Please proceed with your question.

Speaker 1

Thanks.

Speaker 3

Just maybe you mentioned, can you talk a little bit about the quarter on quarter sequential order improvement you've seen across both segments. What markets and geographies are driving that? And what you've seen thus far in April, does that indicate at least some level of sustainability?

Speaker 2

So the orders well, first of all, good morning, Matt. Bob and I are both kind of ham and egg this question a bit. So on the APS side, we saw some orders in those larger projects. And so while those were some of the things we were waiting on, we did start seeing some of those break in the last quarter. And what I would say to that is that we were pleased with obtaining more than what I would say is our fair share of those order decisions as they came to pass.

Speaker 2

So we were pleased with that. There are still as you know, there is still robust order pipeline on those large projects that is anticipated to come over the next several quarters. Place where we have continued to see some of the delays in decision making is kind of those midsized projects, whether that's compounding lines or whether that is some of the larger food lines that we've been bidding on. Some of those are even some of the ones that we are going to market with as a, for instance, as a consolidated portfolio in our systems offering for the first time as we're building our pipeline for that. So that's those are some of the places where we've seen a little bit of slowness.

Speaker 2

The quick cycle business, like the service business, has continued to see great performance, good strength, kind of on a global basis across all of the brands. And we have recently announced that the service organization is the new food acquisition is also going to become a part of the service organization of APS. And so we are really looking forward to the traction that we will gain there, having them be a part of the entire service structure of the business, so that we can begin to focus our efforts there on the expansion that we talked about from a synergy standpoint. On the MTS side, what we saw was a bit of recovery specifically in North America, in the automotive area, in the injection molding. And so we were pleased to see that.

Speaker 2

That's a that has been they have been in a period over the last 6 or so quarters where they've been at this low. This is their highest order intake on the injection molding side of business in 7 quarters. So we were pleased with that. And hopefully, we've seen the trough and are starting to come out of that a bit. On the hot runner side, we continue to see some softness and that is primarily that is a China and North America market for us primarily.

Speaker 2

We have footprint in India. We have we service the European geographies. Those aren't the largest part of the market though. So our market is kind of dictated by the in the hot runner space is dictated by primarily the China market and the U. S.

Speaker 2

Market. We have a decently sized footprint in consumer goods, which is not an area that has recovered yet on the hot runner side. So, we continue to monitor that on the runner side. But again, on the injection molding side, we've seen some nice pickups in some of the markets that are relevant for us and anticipate at least as we talk to our businesses, the outlook continues to be, I would say, optimistic in those areas as they begin to see some uptick. Bob, anything else that I did not have?

Speaker 2

No, I think you covered everything.

Speaker 1

So as a follow-up,

Speaker 3

you mentioned yes, yes, no, absolutely. Thank you, Kim. With respect to the commentary regarding the incremental price pressure you've seen in MTS, I'm curious as you've gone back and realizing you acquired this in late calendar 2019, so I understand that. But as you've gone back and I'm sure studied past cycles, is that typical customer behavior in the latter stages of a downturn in that business? And then if you could also maybe delineate a little bit the takedown you had in the MTS EBITDA margin guide.

Speaker 3

Can you maybe parse that out a little bit between how much of that is adverse moves in price cost versus the inefficiency issues that I believe Bob touched on? Thank you.

Speaker 1

Sure. Yes. So Matt, on your first question, it is typical when there is a downturn that there's this pricing pressure. It's a little bit different now versus the last cycle just because China isn't growing at the levels that was, call it, 6 or 7 years ago. But it is typical to have pricing pressure during these cycles.

Speaker 1

And as far as the margins, really the pricing pressure is probably we call it pricing is probably a third of the margin decline, unfavorable mix from what we thought is probably a third as well. And then the manufacturing inefficiencies, probably a third. And again, the restructuring, we expect to clean that up. And so we'll get out of that in Q4, as I mentioned.

Speaker 3

Got it. Thank you, guys.

Speaker 2

Great. Thanks, Matt.

Operator

Dan. Thank you. Our next question is from the line of Daniel Moore with CJS Securities. Please proceed with your questions.

Speaker 4

Thank you. Kim and Bob, appreciate the color and taking the questions. Forgive me if this is a rehash of Matt's first question to some extent, but just looking at the midsize equipment projects in APS, it sounds like you're seeing delays. Are you seeing any order cancellations at this stage? And what are you hearing from your customers in terms of what they need to turn the investments to get back on?

Speaker 4

Is it lower interest rates? Is it geopolitical stability? Like what is it that's key hold up? Thanks.

Speaker 2

So we are so what we're hearing on those midsized projects, one of the things that I think is going to be exciting around this is that we those midsized projects typically follow they typically follow where we've had large pellet projects. So as capacity is coming online, then that capacity has to go somewhere. And typically these midsize projects are compounding lines and We we didn't always that wasn't a big compounding footprint for us historically. However, what we are seeing that is encouraging from our point of view is that as these formulations and requirements for these products, the output requirements are increasing, the quality requirements are increasing and that moves towards what we do. And so some of the there are some opportunities that we see in these markets where we've been putting a lot of capital investments in on the large projects where we think a lot of these relationships will continue to foster themselves into new opportunities for us to get into that midsize project space because of the increasing complexity of demand.

Speaker 2

And so that is that's kind of an exciting opportunity for us. From that point of view, I would say that we feel pretty bullish about some of the opportunities that will be coming down the road. What expectations are there? I think we have to continue to see a leveling out in consumer demand. I think we have to continue to make sure that these plants are coming online.

Speaker 2

The plants we've been working on for a number of years now in certain geographies as those come online, the investments for the next step of the process will break free and come online. Remember the cycle times for those jobs are significantly shorter than the, call it, 4 years that you might see for one of those large really large project investments between the time that the project is conceived and the time that the plant is commissioned. So that's kind of what we're looking at. And in the meantime, we're continuing to build our service business, with our large implementations and continue to focus on that on a global basis.

Speaker 1

Yes. And then Dan, just to be specific to your question, we've had no cancellations on orders and no cancellations in our pipelines. Our pipelines are built on active discussions and those continue to grow. And I think interest rate certainly is a factor and as those start to maybe decline, I think we'll get some of these unlocked.

Speaker 4

That's helpful. Appreciate it. Any just more color on the incremental restructuring efforts, where specifically the cost saves are coming from and how do we think about kind of incremental margins when volume eventually starts to recover? Is there a kind of a shorter or medium term benefit in terms of the incrementals following the not just the incremental $5,000,000 but the overall restructuring program?

Speaker 1

Yes. So we did announce obviously in our last quarter call, we expected to take a charge of about $20,000,000 in Q2. We did bring that up a bit to about $25,000,000 Then we therefore increased our savings expectations from $15,000,000 to now $20,000,000 Now that's going to be about $8,000,000 of benefit coming in 2024 with the full expected run rate to come in 2025. As far as APS, you did see in our prepared remarks, we are taking some smaller targeted charges, particularly in North America, and that's really just to adjust for some of the near term order pressure in some of those product lines that we highlight, so the small and mid term projects.

Speaker 2

And one thing, Dan, this is I know we've talked about this before, but I'll just kind of embrace this again. Remember when we started expanding significantly the order levels in APS, we began to develop partners. So we have a certain amount of that capacity that we execute inside and a certain amount of that capacity that we have developed partners outside the business. So if you look at the nearly doubling of that business over the last 5 or 6 years, the footprint of employees have not doubled in response to that. And what that does is it gives us a certain ability to flex when demand goes up or down.

Speaker 2

And what you've seen over the last quarter, the last couple of quarters, we were flexing down and we were able to do that without a lot of incremental cost. And then we will be able to flex back up as orders come in. So for instance, we saw a number of orders come in, in those large projects. So now we're back at a point where we need that flex capacity that, for instance, we had taken offline over the couple of quarters before that. But that took us a number of years to develop.

Speaker 2

And so I'll give a of credit to Oleg Bartle and his team on the Coherent side at anticipating this and developing those partners over a number of years. It's a muscle that we're working to build all over the company, but it's been a great tool for us now. And so we're using that right now as we're trying to get these new projects that have been signed in the last quarter up and running again. And while we've still got pieces of the business that are kind of waiting on a bit of the order pipeline flow through.

Speaker 1

Yes. And because of that flexibility, Dan, to your question incrementals and APS, that's generally in that 35% to 40% range. And because of that flex, that's how we're able to maintain that flow through.

Speaker 4

Got it. Last one for me. I'll jump back in queue. Obviously, as you called out, free cash flow softer than and the revision in free cash flow certainly higher than the change in the EBITDA guide. Just kind of walk us through the biggest buckets impacting free cash this year?

Speaker 4

And how long would you anticipate it likely to take to get back to the more typical 90% to 100% conversion rate that you target? Thank you.

Speaker 1

Yes. So that the reduction is probably half earnings and half advances are related to timing of orders, Dan. Now I'd say that's partially offset by the trade working capital improvement actions that we've been focused on. And so we continue to focus on the fundamentals around improving our trade AR, trade AP and inventory. And so as I mentioned, we did see some good improvements in those areas over the last year.

Speaker 1

And I'd expect to see continued trade working capital improvements as a percent of sales here moving forward. And that's both on the acquisitions, but also even on the legacy businesses. And so as as those orders finally get released, again, we saw some of that the large orders get released in Q2. And I think as we get into 25%, I think we'll be back to that 90% to 100% range pending that order timeframe. But in the meantime, we're going to be focused on the fundamentals that we can control.

Speaker 1

Thanks. I'll circle back with my follow ups.

Speaker 2

Great. Thanks, Dan.

Operator

Thank you. At this time, we've reached the end of the question and answer session. Now I'll turn the call over to Kim Ryan for closing remarks.

Speaker 2

Thanks again for joining us on the call today. We appreciate your ownership and your interest in Hillenbrand. We look forward to talking to you again in August when we report our fiscal Q3 results and wish you all a great week and a great day. Thank you.

Operator

This will conclude today's conference. You may disconnect your lines at this time. We thank you for your participation and have a wonderful day.

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