Hillenbrand, Inc. (NYSE:HI) Q1 2023 Earnings Call Transcript

Hillenbrand, Inc. (NYSE:HI) Q1 2023 Earnings Call Transcript February 9, 2023

Operator: Hello and welcome to the Hillenbrand Q1 2023 Earnings Call and Webcast. As a reminder, this conference is being recorded. It’s now my pleasure to turn the call over to Sam Mynsberge, Vice President, Investor Relations. Please go ahead.

Sam Mynsberge: Thank you, operator and good morning everyone. Welcome to Hillenbrand’s earnings call for the first quarter of 2023. I am joined by our President and CEO, Kim Ryan and our Senior Vice President and CFO, Bob VanHimbergen. I’d like to direct your attention to the supplemental slides posted on our IR website that will be referenced on today’s call. As a reminder, the Batesville segment has been classified as discontinued operations for all periods presented. Our commentary will be based on the performance of our continuing operations unless otherwise noted. 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 impact from acquisitions, divestitures and foreign currency exchange. I encourage you to review the appendix in 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 will now turn the call over to Kim.

Kim Ryan: Thank you, Sam and good morning everyone. Thanks for joining us today as we review results from our first quarter of fiscal 2023. Last week, we closed the sale of Batesville, completing our transformation into a pure-play industrial company. This transaction represents a significant milestone in Hillenbrand’s journey. First, it builds upon the momentum we created over the last 12 months with the strategic acquisitions we made in food and recycling. It also simplifies our portfolio to fully focus on our expertise in developing highly engineered, mission-critical industrial processing equipment and solutions for our customers. And finally, it positions Hillenbrand for long-term profitable growth through our leading brands and attractive end markets supported by secular growth trends.

I want to thank our associates who have worked tirelessly towards the successful completion of this transaction. I spent 17 years in my career with the Batesville organization and I am confident that both companies are in a place of strength as we move forward to pursue our own unique opportunities to create value. We have built a strong foundation at Hillenbrand, in large part to the tenets of customer service, lean operations, talent development and responsible corporate citizenship instilled through Batesville’s legacy. I want to thank the entire Batesville team for their contributions. Now I will turn to our first quarter performance. Despite continued uncertainty impacting the broader global economy, we delivered a solid start to the fiscal year.

Our first quarter revenue from continuing operations grew 16% compared to the prior year, driven by our recent acquisitions and healthy organic growth for our Advanced Process Solutions segment. In the quarter, we saw good demand for our newly acquired food and recycling businesses and we saw continued growth in our aftermarket business. Our backlog, which now includes LINXIS and Peerless, nearly $2 billion at the end of the quarter and our organic APS backlog remained at near record levels. Our APS project pipeline remains robust for our highly engineered equipment and solutions across our key growth platforms of durable plastics, recycling and food. Starting with our core plastics business, we continue to see strong demand in Asia and the Middle East, as polyolefin and engineered plastics customers are quoting projects at increasing output requirements to meet the growing global demand for durable plastics.

This is a positive trend for us as we are a global leader in providing complete systems with high-output, high-quality capabilities. Turning to recycling, as we have discussed, we believe recycling will be a high-growth area for us. Since our acquisition of Herbold last year the pipeline of orders have been even better than we planned, with growing demand in North America, India and the Middle East. We are excited about the momentum in this area, which we aim to further bolster with our recycling innovation center in Germany, which will be completed in April of this year. Now to food, we had better-than-planned orders and revenue in the quarter, driven by solid demand across North America and Europe. Through the combination of our Coperion and LINXIS technologies, we are seeing increased quote opportunities as customers recognize the value of comprehensive solutions which we can now provide.

We have been able to adapt certain feeding technologies that were historically used for our plastics applications to help increase share of wallet with existing LINXIS customers and have already seen success with this approach within the first few months of ownership. Finally, our integration program is proceeding well and we remain confident in the value creation we expect to achieve from the LINXIS, Peerless and Gabler acquisitions. While we are seeing solid momentum in our APS segment, the uncertainty of the macroeconomic environment continued to pose challenges for our MTS segment, which tends to be quicker turn and serves applications that are closer to the consumer. As discussed during last quarter’s call, we experienced customer decision delays that resulted in order softness as we entered the quarter.

This trend continued through the quarter, and while we’re optimistically monitoring the reopening of China, we’ve not seen the order pipeline convert yet as sales representatives are just now beginning to travel inside China again to drive these project decisions. Additionally, while the supply chain and inflationary pressures have begun to ease, we continue to experience shortages for chips and other electronic components, which more heavily impacts our MTS segment. We remain focused on deploying the Hillenbrand operating model to prioritize critical investments, manage discretionary costs and drive operational efficiencies in response to the extended softness. Bob will address this further when he covers our results and full year outlook.

Overall, we continue to see strong performance and outlook for our ATS segment, while remaining focused on managing through dynamic macro environment impacting our MTS segment. As we communicated at our Investor Day in December, our renewed strategy for the next chapter of our journey is to grow, enhance and optimize. We are excited about the opportunities to continue our momentum through the disciplined deployment of capital towards higher growth, high-return investments that will further position Hillenbrand for long-term shareholder value creation as a pure-play industrial leader. Lastly, before turning the call over to Bob, I’d like to quickly provide an update on sustainability. With the recent changes in our portfolio, we have revisited our materiality assessment to ensure that we advance our sustainability strategy with our stakeholders in mind, while also incorporating our new acquisitions and accounting for the Batesville divestiture.

We plan to publish the results of our survey in our upcoming annual sustainability report later this year. With that, I will now turn the call over to Bob to provide more details on our financial performance and outlook.

Bob VanHimbergen: Thanks, Kim, and good morning, everyone. Turning to Slide 6, a few items to note throughout my section. As Sam mentioned, Batesville’s financial results are reported as discontinued operations for all periods presented. For today’s discussion and going forward, I’ll be reviewing our performance and providing guidance on a continuing operations basis only, unless otherwise noted. Results compared on an organic basis exclude the impacts of acquisitions and divestitures as well as foreign currency exchange. We believe these comparisons provide a clear assessment of our performance and you’ll find reconciliations of our GAAP and non-GAAP results in the appendix of the earnings slide deck. In our first quarter, we delivered revenue from continuing operations of $656 million, an increase of 16% compared to the prior year, primarily due to acquisitions, higher aftermarket revenue and favorable pricing.

On an organic basis, revenue increased 4% year-over-year. Adjusted EBITDA from continuing operations of $101 million increased 13%. On an organic basis, adjusted EBITDA increased 3% as favorable pricing and productivity improvements were partially offset by cost inflation and strategic investments. Adjusted EBITDA margin of 15.4% decreased 40 basis points primarily due to the dilutive effect of price cost. We reported GAAP net income from continuing operations of $27 million or $0.35 per share, an increase of 21% compared to the prior year. Adjusted earnings per share from continuing operations of $0.70 increased $0.14 or 25% compared to the prior year, primarily due to pricing and productivity improvements, the impact of acquisitions, fewer shares outstanding and a lower tax rate.

This was partially offset by inflation, unfavorable foreign currency exchange and higher interest expense. This performance was ahead of our expectations coming into the quarter, as our total adjusted EPS, included Batesville, of $1 was above our original guidance of $0.85 to $0.93. The adjusted effective tax rate in the quarter was 25% and or 520 basis points favorable to the prior year, primarily due to a discrete onetime impact from a tax incentive in China for high-technology companies. We anticipate our full year tax rate to remain in the range of 29% to 31%. Cash flow from operations represented a use of cash of $6 million in the quarter down approximately $26 million from the prior year, primarily due to unfavorable customer advances resulting from order softness within MTS, which was more significant than we expected.

As Kim mentioned, we continue to experience pockets of supply chain challenges in the quarter, causing inventories to remain above optimal levels while also causing delays in achieving certain project milestones, which resulted in higher-than-planned unbilled AR. We remain confident in our ability to drive strong working capital fundamentals across the business, and we’re cautiously optimistic that the broader supply chain will continue to improve as we work through the balance of the year. With that, we anticipate stronger cash flow in the remaining quarters and expect our full year cash flow conversion to be approximately 80% to 85%. I highlight this includes approximately $20 million of onetime cash charges related to the divestiture of Batesville that do not qualify for discontinued operations reporting.

Excluding these items, our full year conversion would be roughly 90% to 95%. Capital expenditures were $15 million in the quarter, which was in line with expectations. Now moving to segment performance, starting on APS on Slide 7. APS revenue of $430 million increased 30% compared to the prior year, driven by acquisitions, higher aftermarket revenue and favorable pricing. Organic revenue increased 5% year-over-year. Adjusted EBITDA of $71 million increased 31% year-over-year. On an organic basis, adjusted EBITDA increased 9% as favorable pricing and productivity improvements were partially offset by cost inflation and an increase in strategic investments. Adjusted EBITDA margin of 17.3% increased 10 basis points, while organic adjusted EBITDA margin of 18.1% improved 70 basis points.

As a reminder, the recent acquisitions have margins that are below our legacy segment performance, but we fully anticipate bringing these margins in line over the next few years through the deployment of the Hillenbrand Operating Model to execute on operational improvements and achieve synergies. Backlog of $1.63 billion increased 23% compared to the prior year or 11% on an organic basis, driven by strong order volume for large plastic projects and aftermarket parts and service. As Kim mentioned, we continue to see a solid pipeline of demand in our key growth platforms of plastics, recycling and food, and are excited about the opportunities we are quoting through our enhanced customer offerings across these end markets. Turning to MTS on Slide 8, revenue of $243 million decreased 2% year-over-year, but increased 2% on an organic basis as favorable pricing and higher aftermarket parts and service revenue were partially offset by a decrease in hot runner sales.

Adjusted EBITDA of $43 million decreased 17% compared to the prior year or 11% organically. Adjusted EBITDA margin of 17.7% decreased 310 basis points as inflation, unfavorable mix and reduced operating leverage on lower volume more than offset favorable pricing. Backlog of $334 million decreased 18% compared to the prior year and 8% sequentially, primarily due to the execution of existing backlog and a decrease in orders for injection molding and extrusion equipment. We anticipated customer delays in MTS as we enter the quarter, though these persisted to a greater extent than initially expected, particularly within our injection molding product line. We now expect this cost softness to persist for longer than initially anticipated, which is now reflected in the updated guidance I will discuss later in the presentation.

As Kim mentioned, we are taking measures to curtail our discretionary spend and prioritize investments to help mitigate the current demand softness. Turning to the balance sheet on Slide 9. Net debt at the end of the first quarter was $1.7 billion, and net debt to pro forma adjusted EBITDA ratio was 2.9. At quarter end, we had liquidity of approximately $689 million, including $195 million in cash on hand and the remainder available under our revolving credit facility. With the sale of Batesville completed, we expect after-tax net proceeds of approximately $530 million, which we plan to use to reduce existing debt. which will result in pro forma net leverage of approximately 2.6x at the end of December 31. Turning to Slide 10. As many of you know, we have a strong track record of deleveraging acquisitions, and we expect to continue this track record as we move forward.

Now moving to capital deployment priorities on Slide 11. As a pure-play industrial company, we will look to deploy capital to maximize shareholder value through attractive organic and inorganic growth opportunities, as well as returning cash to shareholders through opportunistic share repurchases and dividends. while continuing to target net leverage within the range of 1.7 to 2.7. Now let me conclude my prepared remarks with our updated outlook. Turning to Slide 12, with the divestiture of Batesville, we were moving $600 million to $610 million of annual revenue and $0.95 to $1 of annual adjusted earnings per share from our guidance model, which reflects Batesville’s previously expected financial contribution as well as the expected reduced interest expense from the planned paydown of debt with the net proceeds from the sale.

With that, our previous guidance would have equated to a total annual revenue of approximately $2.7 billion to $2.8 billion, and adjusted earnings per share of $3.15 to $3.50 on a continuing operations basis. Now moving to Slide 13. Given recent developments, including a more favorable expected foreign currency impact, the addition of Peerless and the softer-than-expected performance in our MTS segment, we are updating our continuing operations guidance for the full year. As a result, our guidance now assumes slightly increased expected revenue of approximately $2.8 billion to $2.9 billion for the year, with adjusted earnings per share from continuing operations in the range of $3.25 to $3.55, reflecting year-over-year growth of 20% to 31% on a continuing operations basis.

Now turning to the segments. For APS, we are increasing our expected annual revenue range from $1.78 billion to $1.83 billion, previously $1.66 billion to $1.74 billion. This change reflects a more favorable expected foreign currency impact, primarily due to the stronger euro, as well as the contribution from Peerless, which we closed at the beginning of December. Our assumption for underlying organic growth remains strong at approximately 10% to 13%. We are maintaining our expectations for adjusted EBITDA margin to be in the range of 19% to 20%, which reflects underlying organic margin expansion of 60 to 100 basis points. For MTS, we are reducing our expected annual revenue range to be $980 million to $1.02 billion, previously $1.02 billion to $1.06 billion.

As a result of the lower anticipated volume, we are reducing our adjusted EBITDA margin expectations to be in the range of 19% to 20%, from our previous guide of 20% to 21%. With the recent changes to our portfolio and the ongoing macroeconomic uncertainty, we are providing a Q2 guidance range for adjusted earnings per share from continuing operations, which we expect to be $0.65 to $0.73, which is essentially flat to slightly ahead of the prior year, as EPS growth, including acquisitions, is expected to be mostly offset by continued softness within MTS, unfavorable foreign currency exchange and a higher tax rate. Please review Slide 13 for additional guidance assumptions. As we look forward to the balance of the year, we continue to see strong momentum in our APS segment.

which is helping to mitigate the order softness we see within our MTS segment. Our recent acquisitions are off to a solid start and performing ahead of our expectations. Our teams have remained nimble despite the ongoing macroeconomic uncertainty, and I’m confident in our ability to continue to position Hillenbrand for further growth and shareholder value creation as a pure-play industrial company. With that, I’ll turn the call back over to Kim.

Kim Ryan: Thanks, Bob. Before taking questions, I’ll end our presentation this morning with a few final remarks. Our strong backlog provides stability as we continue to navigate this challenging macro environment. And I remain confident in our proven track record of driving operational excellence through our organization, which is enabled by the dedication of our associates and the discipline instilled by the Hillenbrand Operating Model. Additionally, our recent acquisitions are off to a great start, and we remain committed to driving strong returns on these investments. The completion of the Batesville divestiture marks an important new chapter in our transformation journey. In my over 33 years at Hillenbrand, I’ve never been more excited for the future with our renewed focus and strategy to propel our growth as a pure-play global industrial leader.

As discussed at our Investor Day, we’re well positioned to create value through our leading brands, serving large and growing end markets through our focus on highly profitable aftermarket growth and continuing to expand our capabilities through strategic M&A., by utilizing the Hillenbrand Operating Model to drive sustained operational improvements, productivity and synergies and by deploying capital towards high-return opportunities that we believe will maximize shareholder value. We remain committed to our purpose to shape what matters for tomorrow as we provide excellent opportunities for our associates, world-class product solutions and service to our customers, positive impact to our communities and a compelling value for our shareholders.

We will now open the line for your questions.

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Q&A Session

Operator: Our first question today is coming from Daniel Moore from CJS Securities. Your line is now live.

Daniel Moore: Thank you. Good morning, Kim. Good morning, Bob.

Kim Ryan: Good morning.

Daniel Moore: Thanks for taking my questions, and all the detail, particularly as it relates to bridging the gap between the pro formas, very helpful. So maybe start with APS. You mentioned some of the regions, obviously, plastics remained strong, food, recycling. Just talk about where you’re seeing incremental strength both by region and end market. And maybe just the outlook for margins. Beyond the current guide, looking out over the next 1 to 2 years, do you see margins coming up as those acquired businesses layer in and you generate synergies? And talk about kind of aftermarket parts and how those trend as a percentage as well. I know it’s a mouthful, but digging into that a little deeper is really helpful. Thanks.

Kim Ryan: Okay. Alright. So I’ll take kind of the demand and market base, and I’ll let Bob comment on the €“ how we’re layering those margins in. So from a demand standpoint, we continue to see overall stability. So let’s kind of look geographically. China reopening and now that they are through the Chinese New Year, the Lunar New Year, and resources are again able to travel in China that, that will, I think, be a positive momentum for us as we are allowed to get those projects we’ve been working on. Our sales and service representatives will be allowed to move around the country more freely to be able to continue to drive the project decisions on new capital, but also to implement service packages and commission the plants that we’ve been working on over the last couple of years in country, because that limiting of travel has been €“ has created some of the challenges that we’ve had in our rising AR that we commented on earlier.

So as those resources are able to go and commission those plants, in China, we expect that, that will be a positive move forward for us. India, as €“ India and the Middle East, as we’ve commented, have been kind of areas of new demand geographically for the APS market. And those are projects that have been under discussion for some time but are beginning to move ahead in those two regions. We have footprint in each of those regions, both from a sales and service perspective and we are well positioned to be able to respond to customer needs there. The U.S. has been very stable. And in all of these markets where we’ve had capital implementations over the last few years, we’re beginning to see the service side of the equation begin to kick in.

And as we’ve commented, we’ve seen good growth in our parts and service business, and that is also something that we’re really looking forward to over the next 12 months. So that’s what we see on the demand side for APS on the normal plastics business. On the food side, that business is primarily today and in U.S. and in Europe, and we’ve seen good demand in both of those areas, and we expect that to continue. The benefit of our acquisition with LINXIS is the long tenure and the quality of the brands that they have operating in that market, and the relationships that they have, both with local players and global multinational players that we continue to be able to work with them, and that will be a part of the value equation as we continue to cross-sell and be able to be more responsive with a broader portfolio that we can take into those markets.

And on the recycling side, we’ve continued €“ as we commented, we’ve seen good demand in a variety of end markets there. And as a result of our presentations at K Show in October of this year and showcasing some of the more some solutions that we can now offer, we continue to be really encouraged about the demand we’re seeing and the quoting volume that we’re seeing in that business as well. Now I’ll let Bob hit margins.

Bob VanHimbergen: And so as we think about just EPS margins longer term, over the next couple of years, we do see margins continue to improve, really driven by a couple of things. First one would be the continued application of the operating model, and certainly turning into about 100 basis points of annual productivity improvement year-over-year. I’d say the other thing to highlight, with the acquisitions we’ve made in the last several months, those margin profiles were below what our segment level margins are. And so we do see those accreting up to our segment level margins, not only through the operating model and continue to drive some more synergies, but also the aftermarket mix, which, as you know, I think we stated, is in like the low 20s of the revenue profile. And for us, it’s in the 30%. So we will continue to see those I guess that the application of our aftermarket strategy to continue to move those margins up over time.

Daniel Moore: Very helpful. Thank you. Maybe switching gears to MTS. It sounds like not quite yet, but I’m wondering if you’re seeing any pickup, if not in revenue, then maybe just in activity or inquiries following the lifting of COVID restrictions in China and, more recently, the passing of the Lunar New Year or is it still a little too early to tell?

Kim Ryan: We are really just getting back into that market, when you consider the market opened up in kind of mid-December, but then there was obviously a very significant increase in the number of COVID cases there, followed by the Lunar New Year and the preparations that many were doing for that. So, we are getting back to the more broad-based travel. We are reenergized with the sales force out and working with customers on projects that have been somewhat delayed from a decision standpoint. So, we are seeing a lot of activity there yet. We haven’t seen those convert into orders yet. And €“ but we are anticipating that, that will begin to pick up. And we expect that market, which is one of our larger markets to €“ especially in our molding products business, we expect that to improve over the remainder of the year.

We had initially anticipated that, that softness would last just the first half of the year. We expect that may last into the second half of the year, and that’s reflected in our guide. On the injection molding side, we continued to see a little bit of delay and some slowness in decision making in our North America market. But again, remember that one of our primary markets there is the India market that has been more stable. But we expect to see some improvement there over the back half of the year, just perhaps not on the original timeframe that we had anticipated. But a strong footprint in India and a leading position in India, we think will serve us well as that market begins to pick up on the MTS side.