Hillenbrand, Inc.
Q4 2020 Earnings Call Transcript

Published: 12 Nov 2020

[Operator:]

Good morning, everyone, and welcome to Hillenbrand's Fourth Quarter Fiscal 2020 Earnings Conference Call. A replay of this call will be available until midnight Eastern Time, November 26, 2020, by dialing 1-855-859-2056 toll-free in the United States and Canada or [phone] internationally and using the conferencing ID number 9256319. This webcast will be archived on the company's website atir.hillenbrand.com through Friday, December 11, 2020. If you ask a question during today's call, it will be included in any future use of this recording. Also, note that any recording, transcript or other transmission of the text or audio is not permitted without Hillenbrand's written consent.

[Rich Dudley:]

Thank you, operator. Good morning, everyone, and welcome to Hillenbrand's fourth quarter fiscal 2020 conference call. I'm joined by our President and CEO, Joe Raver; and our Senior Vice President and CFO, Kristina Cerniglia. I want to direct your attention to the supplemental slides posted on our IR website that will be referencing on today's call. Today marks my last earnings conference call, as I’ve taken on a new finance role within Hillenbrand. I’ve enjoyed serving in this important position over the last two and a half year and I want to take the opportunity to thank you for your trust and partnership. I’m very happy to welcome Cabey Bakhtiary as our new Investor Relations Director. Cabey and I will work closely together over the coming weeks to ensure a smooth transition. Let me quickly address two items before turning the call over to Joe. First, during the fiscal fourth quarter, we changed the names of two of our reportable segments in order to better reflect the nature of business activities and end market exposure for these segments. As a result, the former process equipment group segment has been renamed “Advanced Process Solutions” or ATS and the former Milacron segment has been renamed “Molding Technology Solutions” or MTS. Legally these names better capture the nature of activities and future opportunities for these segments. We’ll continue to use the Milacron brands name for our injection molding product line. Second, turning to slide four, I’ll remind you that our comments may contain certain forward-looking that are subject to the Safe Harbor provisions of U.S. federal 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 pro forma comparisons for the Molding Technology Solutions segment. I encourage you to review Slide four of the presentation and our 10-K, which can be found on our website, for a deeper discussion of forward-looking statements and the risk factors that could impact our actual results. With that, I'll turn the call over to Joe.

[Joe Raver:]

Thank you, Rich, and good morning, everyone. Thanks for joining us today. And all of us at Hillenbrand, we hope that you and your families are doing well and staying safe. Before we start, I want to take a moment to thank Rich for his contribution to Hillenbrand’s investor relation and wish him continued success in his new role.

[Kristina Cerniglia:]

Thanks, Joe. And good morning, everyone. Our team continued to adapt to a dynamic environment and executed very well in the quarter. That strong execution along with an accelerated economic recovery compared to our expectations going into the quarter yield a terrific finish to our fiscal year. We reported total revenue of $694 million for the fourth quarter, an increase of 43% over the prior year. Growth was driven primarily by the Milacron acquisition while Batesville’s revenue remained unseasonably strong due to pandemic and contributed to the year-over-year increase. Foreign exchange turned positive and benefited the top line by 2%. Revenue decreased 2% organically. Adjusted EBITDA of $141 million increased 62% over the prior year, primarily due to the Milacron acquisition, and strong baseball performance. Consolidated Adjusted EBITDA margin of 20.3% expanded 240 basis points. Organically Adjusted EBITDA increased 4% and Adjusted EBITDA margin increased 110 basis points with margin expansion in both Advanced Process Solutions and Batesville segments. I will provide more details about our margin performance when I review the segment results. We reported a GAAP net loss of about $7 million or $0.09 per share, a decrease of $0.48, primarily as a result of non-cash impairment charges of $62 million related to businesses identified for divestitures as part of our portfolio simplification effort. Adjusted net income of $69 million resulted in adjusted earnings per share of $0.92, an increase of 8% mainly driven by the Milacron acquisition and strong Batesville performance. As a reminder, adjusted earnings per share excludes after tax amortization of acquired intangible asset. Amortization expense was approximately $17 million in the quarter and the adjusted effective tax rate for the quarter was 32.1%, an increase of 560 basis points year-over-year, driven by increased distributions from foreign subsidiaries.

[Joe Raver:]

Thanks, Kristina. As we close out our prepared remarks, I want to update you on the portfolio actions we announced last quarter. The process for the plan, divestitures of TerraSource Global and our full control businesses is going well. We've had significant interest in all three assets, and while the current economic and market conditions may have an impact on the timing of a transaction, today, we feel confident in the process and look forward to updating you when we have something to announce. As we move into fiscal 2021, the management team continues to remain focused on executing our near term priorities of running our businesses well and protecting margins during this uncertain time. Integrating Milacron successfully and generating strong cash flow continued to pay down debt. We've taken decisive actions to weather the challenges of COVID-19 and to position Hillenbrand for growth and improve profitability as our markets recover. With that, we'll open the line for your question.

[Operator:]

Our first question is from Daniel Moore with CGS Securities. Your line is open.

[Daniel Moore:]

Joe, Kristina. Good morning. Thanks for taking the questions.

[Kristina Cerniglia:]

Good morning, Dan.

[Joe Raver:]

Good morning, Dan.

[Daniel Moore:]

Starting with and forgive me, I'll get the new vernacular scroll all the segments down but with MTS Molding technology Solutions maybe just talk about the mix of mold masters, the hot runner business versus injection molding, Q4 into the guidance in Q1, what that looks like right now. And what are the end markets? You mentioned several, but what are the markets that are really driving the recovery here?

[Joe Raver:]

Yes, sure. So let me just let me start off with Q4 from a revenue perspective. We saw continued strength in the hot runner part of the business, so that that part of the business performed better than we expected. And that was really largely different by medical and electronics. On the injection molding side of the business, that business continued to see relatively, modest revenue increase. But as we move through the quarter, we did see parts and service pickup, and we did see orders for smaller, smaller pieces of equipment that we could ship pretty quickly pick up. So really for the quarter, both of those segments performed better than we had expected. The last time, we talked on the on the third, I'm sorry, on the third quarter call last time. And then from an order perspective, we see pretty solid orders continuing on the mold nastier side, on the hot runner side. So that's encouraging as we continue to see good orders and good activity there. And then during the really the second half of the quarter, we saw a very strong order snapback on the injection molding side. So we had just a few weeks where a ton of orders were released, and where we, closed on those orders. And as I mentioned, we continued to see good parts and service orders. So we're still working through how much of that is, kind of one time snap back from a bunch of pent up demand, and how much of that is going to be on-going strength, but I would say the order trends are very strong in both of those businesses as we're heading into our first quarter. And then just one last comment related to the guide, I think was part of your question related to the guide. The hot runner business is a pretty fast turn business. So, that shows up typically in the quarter that you know, or pretty close to the quarter that you're that you get the order so it tracks very closely revenue tracks closely with the order trends, which as I mentioned, remain positive. On the injection molding business, that the two or three quarters sometimes longer order to delivery cycle. So we'd expect to see some of these strong orders on the injection molding side and really mainly impact the second half of our year so we'll see more modest revenue growth, for sure in the first quarter, because it will take a little while for those orders to work through the system to turn into revenue.

[Daniel Moore:]

Got it. That's helpful. And maybe just a follow up there, just trying to kind of understand the mix a little bit. You know you generated exceptionally strong margins in the quarter in that segment guide is for a little bit of a sequential step down. So is that just all mix more injection molding? Or is there anything else? Just trying to get a sense for what the new user base run rate for margins should be on a go-forward basis? Thanks.

[Joe Raver:]

Yes. So I would say, our guide in the first quarter, we expect still to continue strong margin performance. Mix is the driver of that. So we will see, continue to see a pretty heavy mix of the, of the hot runner systems in the first quarter, but also an increase in the injection molding side. So as we move through the year, we'll see likely see margins moderate a little bit as the second to the move to the second half of the year. We work through that backlog on injection molding. There'll be a more, balanced mix in terms of injection molding compared to the hot runner systems.

[Daniel Moore:]

Got it. And then one more, and I'll jump back to queue. But Batesville, obviously continues to be very strong. Were you surprised that the legs that had into fiscal Q4, obviously you've got -- are forecasting continued on seasonal strength? And here in fiscal Q1, just talk about your visibility there? Thanks.

[Joe Raver:]

Yes, thanks, Dan. I think that's another place that we perform better than expected, compared to where we thought we'd be at our last call. If you think about, I think there were some moderation in COVID-19. And then we've seen this really strong second wave, which is continuing to accelerate. Just driving to work today on the radio, I heard that, another day of high deaths in the United States yesterday. And so I think we have a better view towards the potential vaccine and what's happening in the market. And so we'd expect this first quarter as we guided to be up significantly, again, year-over-year. And then quite frankly, as we move into, as we move into our, our second fiscal quarter, that that's a little bit tougher call, given what's going to happen with the vaccine, looks like based on what we see in Australia, as an example, the regular flu may be lighter this year, given everyone's precautions, and the particular strain that it is. So, it's pretty tough to continue to forecast that business. On the one hand, on the other hand, from a external perspective you can kind of track what's going on with deaths in North American good, get a pretty good sense of what's happening with our business. So, unfortunately we're expecting ahead of a decent fourth quarter with elevated volume. And unfortunately, we're expecting that to continue into the, into the first quarter of this year.

[Daniel Moore:]

Understood. Okay, I will jump back with any follow ups. Thank you. And congrats on some exceptional performance in the quarter.

[Operator:]

And the next question is from Matt Summerville with D.A. Davidson. Your line is open.

[Matt Summerville:]

Thanks. A couple of questions. First, I think in the prepared remarks, you mentioned 28% of the long cycle, I believe this long cycle maybe as a total segment. So maybe delineate that but 28% of the backlog you have and what you used to refer to PEG extending beyond 12 months, what is a more normalized number in that regard? If you look back, say over the last five years.

[Joe Raver:]

Yes, I'm going to look over at some of the FP&A folks here. But so I think that number, the 28% is the former PEG segment, the Advanced Process Solutions, and that is those larger projects that tend to get delivered beyond -- they take four, six, sometimes eight quarters to get delivered. And so that's, what those projects are. We've, I think as we've communicated, we've seen that number increasing, particularly over the last few quarters, and really, I guess, across 2020, really all of 2020. That number is typically in the mid-to-high teens. And so, we've seen it creeping up over the last few quarters. I think last quarter it was in the mid-20s, the quarter before that it was around 20 and then sort of high teens before that, which is sort of a normal rate. So it is a bit elevated as we see, continue to strengthen orders. But some of those projects pushing out from a customer perspective, and then you're getting that a higher percentage of the backlog that would be delivered beyond the 12-month period.

[Matt Summerville:]

Is there any way Joe to talk about or to ring some kind of the amount of revenue either via projects, either be maintenance or modernization/upgrades. How much revenue in this business has sort of been deferred? And the timing in which you would expect that to be recaptured at this point?

[Joe Raver:]

So a couple of things. I think it's, it's so and from a, from a backlog perspective, we really don't in this segment. We don't get cancellations typically, especially for the larger project. So in that sense, you can really think of as backlog pushes out that is really deferred. Now, on the flip side of that, we do percentage of completion accounting. And so you will have this as we, as we guided in the first quarter, we'll have this trough. And so that won't snap back really quickly that, that will push out. And so we'll see continued strong revenue in the second half and into 2022, given this backlog of large projects. And so I'm not, I'm not sure if I'm exactly getting to your answer, but in terms of total dollars, we've probably seen about $250 million of backlog of push out beyond where we'd expect it to be, a couple quarters ago.

[Matt Summerville:]

Got it. And just maybe as a final question, you achieved? What was the total synergy realization associated with Milacron in fiscal 2020? And what do you expect to be the key drivers of that next, log of 20 million to 25 million that you mentioned in your slide deck? Thank you.

[Joe Raver:]

Yes, I think we ended the fiscal year about $27 million of realized synergies. And, a lot of that was public company costs. Early on, as we move forward, we'll continue to get some of those benefits of public company cost reductions in 2021. And then, but we'll really start moving more towards more operational oriented savings as we move into 2021 and 2022. And so a big chunk of savings in 2021 comes from our procurement initiatives that really drive across all the industrial businesses, and in Batesville. And then we start to -- we had some productivity savings related to sites, consolidations, etcetera. But we'll start to see more kind of operational efficiencies, as we continue to drive Kaizen events and lean business practices through the entire organization, but special emphasis on some of the operations, particularly the injection molding business, so we'll see that come through. So I would say, really in the second half, it's a bit more operationally focused than what we saw. In the second year 2021, it's more operationally focused than we saw in 2020.

[Matt Summerville:]

Got it. Thanks, Joe.

[Joe Raver:]

Thanks, Matt.

[Operator:]

Your next question is from Chris Howe with Barrington Research. Your line is open.

[Chris Howe:]

Good morning Joe and Kristina.

[Kristina Cerniglia:]

Morning.

[Joe Raver:]

Good morning, Chris.

[Chris Howe:]

Good morning. Well, starting off with the assets that are for sale, can you talk a little bit a little bit more about how they performed in the quarter? And how you see their performance in Q1 or from a general perspective what your expectations are for those businesses as we move through the next fiscal year?

[Joe Raver:]

Sure. So the businesses you're referring to really is the TerraSource Global business and then our Q4 Flow Control businesses. Just a reminder that those are relatively small part of the overall portfolio, less than 5% of revenue. Those businesses really felt the industrial slow down, like our mid-cycle more of our mid-cycle businesses in a pretty similar way. And so, it's difficult to forecast when those businesses will snap back. But, but generally they saw performance kind of like the in line with that solutions performance and then again, it's a little bit difficult to forecast too far forward with those businesses. But, they're good businesses. They're performing well. They've done taking a lot of cost action to protect margins over the past couple of quarters. And again, we see pockets of demand returning. We see other places where we're continuing to see softness in orders on both the capital side and the products and service side.

[Chris Howe:]

Okay. And then my next question is just surrounding APS, Advanced Process Solutions. In the first quarter, you're expecting a 12% to 15%, year-over-year decline. Given what you've seen so far, in October, as much as you can share, do you feel that Q1 is the bottom of that softness, and we should see APS show some sequential improvement or some cadence through the remainder of the year?

[Joe Raver:]

I think this is why we're only giving quarterly guidance. It is really pretty tough to tell. I think, the news of the vaccine is very positive. Again, this business is, is got characteristics of sort of general industrial businesses, which are feeling softness. We do have a couple of those large projects that have pushed out. We expect those projects to resume though, as we move into the second half. And so we expect the second half of the year to be stronger. I would also say the same on the personal service side. The parts and service business continues to remain down on a year-over-year basis. And we would expect that for as we move into the second quarter perhaps, and into the second half of the year, for that to rebound as customers, free up both capital and expense, and also feel more comfortable scheduling some of the larger service projects that we do. And so again, I think this is a business that we would expect to see improved performance in the second half of the year. But, it's just really tough right now, given the difficulty with forecasting around the globe due to the pandemic.

[Chris Howe:]

That's great color. Thank you, Joe. And if we move below the top line for APS, you posted record margin of 20.6% in the fourth quarter. Should we look at that 20.6% as the high end of a boundary range? Or is there potential for slight expansion of that margin opportunity in fiscal year 2021?

[Joe Raver:]

Yes, I think I would think of that margin opportunity more at the high end of the range. I think we've really, we've really squeezed down costs. And especially in the third quarter, we tightened expenses, pretty hard and fast in response to the pandemic. We've freed up some spending in the last in this past quarter across the businesses on tricking areas where we expect a solid growth and really good growth coming out when we come out of this downturn. So I think the other thing is with the mix of large projects, and we'd expect to continue to see a mix of large projects in the second half of next year. And if you know that, that has more buyout in it, so we buy out equipment like motors and gearboxes that brings our margins down a little bit. But with all that said, our margin performance has been very strong as we guided in the first quarter pick on a year-over-year basis. Really across the board, we expect very solid margin performance, probably a little tougher in the APS, the Advanced Process Solutions Division, but again, solid margin performance across the board is what we expected in Q1.

[Chris Howe:]

Great. Thank you for the color. I'll hop back in the queue.

[Joe Raver:]

Thanks, Chris.

[Operator:]

Your next question is from Daniel Moore with CGS Securities. Your line is open.

[Daniel Moore:]

Thank you again. Just two quick follow ups. On the Coperion large project side, the modest push outs are they COVID related, capital constraint related, economic uncertainty. I know it's hard to tease out sort of just COVID operational challenges versus the economic concerns, but what are you hearing from customers as it relates to those project delays.

[Joe Raver:]

Yes, so I think it's a little bit, it's multiple things. I would tell you that when you think about our customers that are more integrated oil and gas companies, they've got capital constraints and spending constraints. So there's a, there's a little bit of that happening in certain parts of the business. Then when you think of our other customers that are really more petrochemical oriented and not doing, drilling for oil and gas and exploration, they're saying, reduced feedstocks, and so in those kittens, which is good for them. And so in those cases, it tends to be other things either COVID related because they can't get a site ready, or financing related or something like that. So we've got a little bit of a little bit of a mixed bag in terms of what the push outs are. I would just say that, it's a little bit more obvious in the United States. So we've seen some of the push out in the North American projects. That really isn't the case around the rest of the world, particularly in Asia, where there continues to be strong demand and a very solid pipeline for these large projects. So the couple of big projects that have pushed out, it's really a bit of a mixed bag. And again, we expect those projects to sort of gin back up more aggressively as we go into the second half of the year.

[Daniel Moore:]

That's helpful. And is there some a little bit of supply chain constraints that you're hearing from the customers, or is that less of an issue?

[Joe Raver:]

I think that's a little bit less of an issue right now. I think a lot of it is caution, is a big chunk of it. I think the supply chains are operating reasonably well around the world. And as I mentioned, we have significant strength in Asia. And when you think about Asia, and particularly China, the supply chains are pretty intact in that part of the world as their issues with the pandemic are much more under control, particularly in China.

[Daniel Moore:]

Perfect. And last for me, Kristina, really impressive to hear that you expect free cash flow conversion after this year to be like, again, above net income. Just confidence there, and what are we to think about from a CapEx perspective for fiscal 2021?

[Kristina Cerniglia:]

Yes, so we do expect to an high level of confidence to continue to get free cash flow greater than our adjusted net income. I would just, mention again, it's going to be it's going to be seasonal, so we're going to see that free cash flow in the back half of the year. And I would tell you that the opportunities are still out there for working capital in particularly inventory for the MTS segments. So we will continue to work with our legacy Hillenbrand businesses or APS and Batesville to maintain their working capital improvement. But really the focus as we move forward will be to get MTS inventory more in line to our expectations. So just given the mix of our businesses, I feel very confident that we're going to get that free cash flow greater than net income. As it relates to CapEx, we are going to be making a little more investment this year than last year. As you know, last year we held off on some investment. So we're looking at about 3% of revenue, or about $70 million to $75 million.

[Daniel Moore:]

Perfect, thank you again.

[Operator:]

We have no further questions at this time. I’d like to turn the call back to presenters for closing remarks.

[Joe Raver:]

Thank you, operator. And I just want to thank everyone for joining us, joining us today. You know these are challenging times. But we feel like we're doing a good job of focusing on execution controlling what we can control. We are especially pleased with the progress that the Milacron businesses have made during the quarter. The integration continues to go quite well. Margins remain strong across the entire enterprise. And then we've made just substantial progress in our debt-to-EBITDA leverage and continuing to bring that down. So as we head into our fiscal year 2021 we feel cautiously optimistic that we'll execute well and have a very good year. And with that, we look forward to talking to you again in February as we discuss our first quarter fiscal 2021 results. Thanks everyone and have a good day.

[Operator:]

This concludes today's conference. You may now disconnect.