Hillenbrand, Inc.
Q1 2021 Earnings Call Transcript

Published: 4 Feb 2021

[Operator:]

Greetings and welcome to the Hillenbrand Q1 Fiscal Year 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Kaveh Bakhtiari, Senior Director of Investor Relations. Please go ahead.

[Kaveh Bakhtiari:]

Thank you. Good morning everyone and welcome to Hillenbrand's first quarter fiscal 2021 conference call. I'm joined by our President and CEO, Joe Raver; and our Senior Vice President and CFO, Kristina Cerniglia.

[Joe Raver:]

Thank you, Kaveh and good morning everyone. Thanks for joining us today and we hope you and your families are safe and well. I'd like to begin by acknowledging the continued dedication of Hillenbrand's employees in managing the business through the COVID-19 pandemic. We remain vigilant in our commitment to ensure the health and well-being of our employees and their families, to meet the needs of our customers, and to execute strategic initiatives that we believe will position Hillenbrand well now and into the future. This past quarter we marked the one-year anniversary for the close of Milacron acquisition. Over the past year, our teams have made rapid progress integrating the business and capturing synergies. We also continue to adapt successfully to the challenges brought about by COVID-19. We ended fiscal year 2020 in a strong position and in the first quarter of fiscal 2021, continued to build on that momentum, delivering strong results. Each segment exceeded our top line expectations in Batesville and the Molding Technology Solutions segment also achieved meaningful margin expansion by driving the benefit of higher volume to the bottom-line. In addition to our solid operating performance in the quarter, we made significant progress against our previously announced plan to exit the Flow Control businesses, Red Valve and ABEL, and we remain on track with our plan to divest TerraSource Global. Overall, I'm pleased with our execution in the first quarter. And while uncertainty regarding the pandemic remains, we are focused on navigating the environment to drive profitable growth in our large platform businesses, capture the full benefits of the Milacron acquisition, and strategically deploy cash flow to drive long-term shareholder value.

[Kristina Cerniglia:]

Thanks, Joe, and good morning, everyone. Throughout my section, I will be referencing pro forma results which exclude Red Valve in the APS segment and the Cimcool business which was divested on March 30, 2020, in the MTS segment. It also assumes the Milacron acquisition closed on October 1, 2019. We believe these pro forma results provide a better comparison of our ongoing operations and you will find a comparison of as-reported and pro forma results on slide 19 of the earnings slide deck. Turning to the quarter, our teams sustained their strong momentum, with continued revenue growth, significant margin expansion and solid free cash flow. We finished the quarter with results that were better than we anticipated, particularly given uncertainties caused by the pandemic. We delivered total revenue of $693 million, an increase of 22%. Excluding the impact of foreign exchange, total revenue increased 19%. On a pro forma basis revenue increased 6%, driven by strong burial casket demand at Batesville and hot runner systems sales in MTS. Adjusted EBITDA of $138 million increased 50% and adjusted EBITDA margin of 19.9%, increased 370 basis points. On a pro forma basis adjusted EBITDA of $137 million, increased 51% and adjusted EBITDA margin was 20%. With the benefit of additional volume along with the actions, we've taken to contain costs across all segments we expanded our adjusted EBITDA margin, 600 basis points over the prior year on a pro forma basis.

[Joe Raver:]

Thanks, Kristina. Let me leave you with a few final takeaways before we open the call to your questions. We executed well and delivered strong performance across the board in the quarter. In particular, we achieved robust growth at Batesville an exceptional EBITDA margin in Batesville and MTS. The acquired Milacron businesses are beginning to accelerate their performance and we remain bullish on the deal's long-term strategic and financial benefits. We're on track to deliver $20 million to $25 million in year two synergies, and we remain confident in achieving year three run rate synergies of $75 million. Continued strong free cash flow performance in the quarter has enabled us to delever at an accelerated pace despite the ongoing backdrop of the COVID-19 pandemic. We further focused our portfolio by divesting Red Valve and signing an agreement to divest ABEL. And finally, we ended the quarter with a record backlog and a robust project pipeline. We believe we will remain well positioned to overcome any near-term macro challenges and are confident in our strategy to drive profitable growth over the long-term. With that, we'll open the line for your questions.

[Operator:]

Thank you. At this time, we will be conducting a question-and-answer session. Our first question today is from Daniel Moore of CJS Securities. Please proceed with your question.

[Daniel Moore:]

Joe, Kristina good morning, thanks for taking the questions and the color. Maybe start with Advanced Process Solutions. You mentioned Asia. Just talk about where the incremental demand is coming from. Are you seeing a significant pickup at auto? Are there other end markets? And are you surprised at all just how resilient it's been?

[Joe Raver:]

Yeah, good morning, Dan. Thank you for the question. So regarding APS and where the strength is in orders and the quote pipeline, Asia is very strong. China is very strong right now. And really it's largely due to their continued expansion of capacity in the country. And so it's really a build up capacity around base resins and engineered plastics and we continue to see that strength and that momentum. And again, I think that's just driven really by two things. One, their desire to be more self-sufficient in the production of plastics. And secondly, the economy there for local consumption is pretty strong. It's probably our strongest area of demand around the world.

[Daniel Moore:]

Very helpful. And you gave pretty good – very good color. But again, the margins at Batesville were just off the charts. So congrats to the team on the incrementals and the execution. Maybe just talk about the glide path toward normalization in the back half of the year beyond this quarter, which obviously will be strong. I know, it will be volume-dependent. But where do we settle back out once the dust has settled Kristina in terms of maybe a longer-term modeling on the Batesville side of the business?

[Kristina Cerniglia:]

Yeah. So obviously that's difficult, because a lot of this is volume. I can tell you from the – looking at the back half, we are going to see inflation hit us particularly around steel and wood. And so we have experienced deflation in that area. So we're going to have inflation there. I think as we look to what normal is and I'm not sure what that is, the team has continued to take actions to focus on productivity, simplify their business, their operations. I think if we just kind of go back to our long-term, we believe EBITDA margin will be around that 20% to 21%. I think that's probably a good assumption to move forward with. Obviously that is when volume stabilizes. And so, if we see a significant drop in volume you can probably expect to see more pressure on the margins. But for the long-term, I think it's probably fair to think about that 20% to 21%.

[Daniel Moore:]

Really helpful and maybe one more Molding Tech Solutions MTS, where -- remind us where is backlog now compared to where we were 8, 12 quarters ago before Milacron started to see some pressure in China. And how quickly does that backlog typically convert to revenue particularly on the injection molding side? Thank you.

[Kristina Cerniglia:]

Yes. So we have very strong backlog. Going back to 8 or so quarters, 8, 10 quarters it's probably the highest backlog. It is the highest backlog that we've seen in the business. And so when we think about the conversion of that backlog, it is going to convert on average between six to nine months. We have a couple of projects that are in there that are -- will go around 12 months. But on average it converts around six to nine months. I would say -- one another thing Dan, one other thing I would just say we do believe that as we look at this backlog there was pent-up demand. And so obviously we had a very strong quarter. So we expect probably backlog to come down a little bit as we go through the year. But nonetheless very strong backlog position exit it.

[Joe Raver:]

Yes. But really all the business lines inside of MTS are in really good position with the backlog. It's not just one of the business lines that's driving that. It's really pretty good across both the hot runner business as well as injection molding business, strong on both sides.

[Daniel Moore:]

All right. Well I have 100 more questions, but I will jump back in queue and maybe get a follow-up for two and thank you.

[Joe Raver:]

Thanks Dan.

[Operator:]

The next question is from Chris Howe of Barrington Research.

[Chris Howe:]

Good morning Joe, Kristina and thank you for taking question.

[Kristina Cerniglia:]

Good morning.

[Chris Howe:]

Good morning. Starting on the MTS segment you mentioned the outlook some second half pressure on margin versus last year due to a higher mix of injection molding. Perhaps you could talk about injection molding versus the other part of the business which has consistently shown very high adjusted EBITDA margins. Is there an opportunity in injection molding further down the road to improve those margins versus the other part of the business?

[Joe Raver:]

Yes so, I think you're exactly right. So the hot runner part of the business is a higher margin part of the business. And on the injection molding side, we're seeing strength in orders on injection molding side. It will be a larger percentage of revenue as we go into the second half of the year. And we do see opportunities particularly over the longer run to improve margins in that part of the business. And really that's driving good lean business practices in the Hillenbrand operating model through that business. And so we're very focused and working with that supply chain group to continue to drive process improvements that will improve both working capital, but also margins over the longer run. Kristina anything you want to add to that?

[Kristina Cerniglia:]

So Chris I think just as a reminder when we think about the EBITDA margins between the -- essentially the hot runner business and the injection molding business there's a 15-point difference in EBITDA margin. And so that is why you're going to see pressure on the margins in the back half. And I agree with Joe, our focus throughout this integration is to ensure that we can deploy the Hillenbrand operating model to increase those margins in injection molding. Obviously it's going to take time. It's not going to get there overnight. We don't anticipate to close the entire gap with those product lines, but we certainly expect improved margins in injection molding.

[Chris Howe:]

That's great. And a follow-up it's hard to ignore it. This uncertainty with the pandemic certainly has created some certainty to the upside for the Batesville segment tremendous leverage in the quarter normalizing at 21% to 22% you mentioned previously. Can you talk about the opportunity that this cash provides? Assuming these different strains and infections continue to rise, it's going to continue to generate not only stable, but increasing cash flow for the business combined to where you are on the balance sheet. Perhaps what I'm getting at is how do you view the strategic opportunity set in the market versus three months ago? And I envision the company could look much different in one to three years?

[Joe Raver:]

Yes. So I'll tell you, you're exactly right that the Batesville business has generated a tremendous amount of cash over the past, really now three quarters going into the fourth quarter of continuous strong demand due to the pandemic. Just related to the pandemic, it's very hard to predict what the future looks like. We do expect the number of deaths to start to drop. In fact, we think we've sort of reached peak and we'll see the number of deaths start to drop over this February and March time frame. When and if we get back to normal it's not exactly clear. And what the various strains mean the new strains of the virus mean over the longer term is also not very clear. But certainly that cash flow has enabled us to help pay down debt more quickly than we had expected if you'd asked us this almost a year ago, maybe 11 months ago at a faster rate than we had expected. And so we have a pretty solid profitable growth strategy. And we've over the last 1.5 quarters or so have released more investment in the business for high-return projects organic projects. And as we continue to pay down debt over the next quarter or so, we're more focused on being open to considering bolt-on acquisitions, strategic acquisitions that also we would expect to get really good returns on. So yes, I think we're in really good position with our balance sheet better than we expected again a few quarters ago. And the Batesville business definitely contributed to that with cash flow.

[Chris Howe:]

That’s right. Thanks, Joe and Kristina. One more if I may. I just wanted to follow up on some comments you made on the last conference call in regard to North America and the large polyethylene system projects in North America. How was that in the quarter? And what's your outlook there? I know it's been slow, but perhaps we're picking up some steam there.

[Joe Raver:]

No, that -- it remains relatively challenged right now in North America related to the large polyethylene projects. And so we've seen a pretty significant shift to Asia and other parts of the world in terms of large projects that are out there and we would expect to work all the way through to close. It was some -- in some reasonable period of time. So we continue to see sort of stable North American business. But right now it's pretty -- we expect it to be more stable as we go forward. But right now it remains pretty weak in North America in terms of expected order intake. And again, more than offset by strength in China and other parts of the world.

[Chris Howe:]

Great. Thanks for taking my questions.

[Kristina Cerniglia:]

Hey, Chris. Just one clarification as well. When I talked about Batesville long-term, I said 20% to 21% EBITDA margin. You mentioned 21% to 22%, I just want to make sure that, you have that clear.

[Chris Howe:]

Yes. Got it. Thank you.

[Operator:]

The next question is from Matt Summerville of D.A. Davidson. Please proceed with your question.

[Matt Summerville:]

Thanks. A couple of questions. I want to make sure, I understand sort of the cadence we should expect in MTS as it pertains to hot runners versus injection molding. So you talked about 37% to 40% growth in Q2. Can you put that in the context of those two product categories and what the expectations would be for the balance of the year there that would get you to mid-teens?

[Kristina Cerniglia:]

Yes, so we are going to see really -- when we think about the growth for MTS on the hot runner business, generally we are going to continue to see the growth that we've been seeing. It's going to stabilize a little bit. They – high single-digit growth is what you're going to see maybe in the third quarter that's going to come down a little bit in the fourth quarter for the hot runner business. And then you're going to see that completely flip. You're going to see significant growth on the injection molding business. And so your – you can expect to see probably high teens growth in the back half that quarter for injection molding.

[Matt Summerville:]

Got it. And then with respect to kind of incoming order rates, overall in that business, can you comment on what you've seen thus far in the calendar year in MTS? And then I want to you spend a second just touching on auto. I would think given all of the platform delays, all of the new model launches that have been pushed to the right as a result of this pandemic I would think there would seemingly be some pent-up demand in auto. So if you're not seeing that now when will you see it?

[Joe Raver:]

Yes, so I think related to auto, let me just break out two parts of the business in MTS. We are seeing some demand on the Mold-Masters side – or the hot runner side of the business, Mold-Masters branded products, the hot runners. So we are seeing an increase in demand there. It's not back to sort of like historic levels but solid demand there. But again, still room to grow. I think on the injection molding side, there we've seen the coat pipeline has picked up pretty significantly has not converted to orders yet. And so, that's what – if you think about the injection molding side of the business it's really about a lot of replacement equipment and capacity expansion not so much driven by new models. So the new model introductions are really the hot runner side of the business and we have seen some increase there sequentially. It's the injection molding side where we see the quote pipeline starting to pick up but have not – has not converted to orders. And again that's overall volume and replacement equipment that's going to drive demand in those orders closing.

[Matt Summerville:]

And then Joe maybe just talk about what you've seen in your order activity calendar year to date?

[Joe Raver:]

Across the board or in a particular segment?

[Matt Summerville:]

Sure across the board would be great.

[Joe Raver:]

Yes. So of course, I won't really talk about Batesville because that's short cycle and pretty obvious. And then, if you look at the APS segment, orders have held up pretty well. So we continue to see the backlog grow in the APS segment. We still expect to see solid demand across the board there. Service has been a little bit challenged but we expect to continue to close large orders and see service improve sequentially as we move through the year. In the MTS segment, we've had solid demand in the hot runner side and that's really a continued growth that we've seen on the hot runner side just sort of like a continuous sequential build in demand on the hot runner side. And then we continue to see strong demand on the injection molding side. We had a big spike in orders in the last quarter. And we expect not as much growth on a sequential basis but still very strong demand on the injection molding side is what we're seeing thus far.

[Matt Summerville:]

And then just – I'll sneak one more in here if I can. In the slide deck Slide 13 you indicated you expect free cash to exceed adjusted net income Kristina recognizing that you probably need a bright hand with space will be a little bit of a wildcard. But what would be sort of a realistic conversion rate that we would expect this year coming off of what was a really good fiscal 2020?

[Kristina Cerniglia:]

Yes, I would say about 100%. So last year we had a really strong back – last quarter back half. As we look at this year we've got a lot of large projects that we're delivering. We're using working capital in our Coperion business kind of in the back half. I would expect about 100% conversion.

[Matt Summerville:]

Got it. Thank you, guys.

[Kristina Cerniglia:]

Yes.

[Joe Raver:]

Thanks, Matt.

[Operator:]

The next question is from John Franzreb of Sidoti & Company. Please proceed with your question.

[John Franzreb:]

Good morning, everybody. Just to follow-up, I guess, on Matt's thoughts here. Joe, it seems like the first quarter there is some satisfaction of pent-up demand. We're going to see that into the second quarter. Can you, kind of, give us a sense of how much you may be deferred orders you expect to come in? And when that reaches equilibrium? What is the opportunity pipeline of pent-up demand in the coming year?

[Joe Raver:]

Yes. So, I think, it depends -- it's a little bit different for each of the businesses in terms of how --where they -- whether they're long cycle or medium cycle or short cycle. And so just kind of, going through the business and putting Batesville aside -- just sort of going through the business, I think, we've really seen -- so the hot runner business in MTS, it's going to really flow with the global economy. And we've seen that come back with -- as the global economy has improved. And we've seen strength in Asia, particularly, China in that business. But as United States and Europe continue to gain strength, we'd expect to see continued improvement in that part of the business, again probably particularly in North America and in Europe. On the injection molding side, it's not completely clear exactly how much of the orders that we're seeing now are really pent-up demand. That's, kind of, a big spike and we'll get back to more normalized rates. I would say, that we've had good strong demand. We had good strong demand in the last couple of quarters. It continues. Service -- parts and service continue to grow. And so I think we'll, sort of, level out to more sort of flattish slightly up sequential growth. We had a couple of really nice quarters in a row. A little bit probably last quarter was -- in the fourth quarter it was probably pent-up demand. In the first quarter, it feels a little bit more sustainable. And again, I think, we also have the upside of automotive as we look forward over the next few quarters. So that's sort of, the MTS segment. And then the APS segment, really we've had exceptionally strong demand for large projects. And so the long-cycle projects demand has been good, demand remains good. Again, a lot of that driven by Asia and some other parts of the world, I think, in the mid-cycle of businesses. So think about compounding machines and feeders. We've seen modest, kind of, sequential growth in that part of the business. And so, I think, that will be more sustained demand as the economy continues to improve around the world. And then parts and service has been challenged and it's been challenged. We're starting to see sequential growth in parts and service. So we expect that to continue to grow on that demand to be very solid and sustainable over the long-term. So really, I think, in the APS business we, sort of, have this air pocket where we have some larger projects that have pushed out that are in the backlog, but we continue to take orders. And then I think as we look forward those projects get released. We expect to continue to see some large projects close and then we'd see continued strength in parts and service. And then the mid-cycle business as the world economy continues to improve will improve sequentially as well. So that may have been a little bit complicated answer. I hope that helped though kind of get a sense of how we see normal...

[John Franzreb:]

That was exactly what I was looking for Joe. Kristina, you kind of outlined in depth the impact of commodity costs on Batesville, but can you talk a little bit about commodity costs in the industrial platforms and how that impacts them going forward?

[Kristina Cerniglia:]

Yes. So let me take it by the separate segments. So, generally in APS with our large projects, we are able to essentially pass that. The way the business works we're essentially able to pass that on to our vendor. So, as you can imagine we know the order. We will place our purchase order on our vendor immediately so that we can lock in the price. So commodity, while there is some commodity inflation in APS, it's not nearly as significant as Batesville and MTS. What we are seeing on MTS is we are seeing inflation. We will continue to see inflation through the rest of the year primarily in steel. And so we expect in the back half of the year in MTS about a little over 100 basis points of pressure on the margin due to inflation in that business.

[John Franzreb:]

Excellent. Thank you. And regarding the realization of the synergies and integration costs for the current year, can you just talk a little bit about the cadence of realizing that $20 million to $25 million and $25 million to $30 million?

[Kristina Cerniglia:]

Yes. So this quarter we had $6 million of synergy that hit the quarter. A fair amount of that was a carryover from actions that we had already taken and so we continue to see that carryover. I think when we think about the synergies, the $20 million to $25 million a good kind of cadence would be just divide that by four, and you're going to kind of see that come pretty evenly across the quarter -- sorry, the year. As it relates to the cost, fairly, you're probably going to see a bump in the second and third quarter of that say $25 million to $30 million. It's going to be higher, I would say, in those couple of quarters.

[Operator:]

That's all the time we have for questions today. I would like to turn the call back over to Joe Raver for closing remarks.

[Joe Raver:]

Thank you operator. Just want to close with saying we're very focused on executing in this challenging environment. The organization is working hard to execute on what we can control and to react and deal with what we can't control. But we're very confident in our ability to execute, in our ability to continue to be flexible and resilient regardless of what happens with the pandemic. And we're excited about getting debt paid down and our balance sheet in good shape. We're starting to see increasing strength in the acquired Milacron businesses. And so we're bullish on the future and look forward to continuing to invest in profitable growth. So, with that, I want to thank everyone who are participating in the call today. We really appreciate your interest in Hillenbrand, and we look forward to talking to you again in May when we report our second quarter results. Have a great day everyone. Thank you.

[Operator:]

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.