Hillenbrand, Inc. (NYSE:HI) Q2 2023 Earnings Call Transcript May 9, 2023

Hillenbrand, Inc. beats earnings expectations. Reported EPS is $0.74, expectations were $0.71.

Operator: Greetings, welcome to the Hillenbrand’s Second Quarter Fiscal Year 2023 Earnings Call. At this time, all participants are in listen-only mode. [Operator Instructions] Please note, this conference is being recorded. At this time, I’ll turn the conference over to Sam Mynsberge, Vice President, Investor Relations. Sam, you may now begin.

Sam Mynsberge: Thank you, operator, and good morning, everyone. Welcome to Hillenbrand’s conference call for our fiscal second 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 divested Batesville segment is classified as discontinued operations for all periods presented. And our commentary will be based on the performance of our continuing operations. 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 of acquisitions, divestitures and foreign currency exchange. I encourage you to review the appendix and 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. Kim?

Kim Ryan: Thank you, Sam. And good morning, everyone. Thank you for joining us today. With the previously announced completion of our Batesville divestiture in February, we have significantly transformed our organization to be focused on delivering highly engineered, mission-critical industrial processing solutions into end markets that are underpinned by long-term secular growth trends. As you know, our primary focus is on the end markets of durable plastics, recycling and food. At the core of these markets is a common foundation of material processing requirements that allow us to leverage our strengths across the enterprise, and where the expanding global middle class and an increased focus on sustainable solutions are key factors driving demand for both increased quantity and quality of products that can be produced on our equipment.

Over the past year, we’ve acquired additional capabilities. And by combining them with our existing Coperion technologies, we’ve enhanced the breadth of our unique end-to-end solutions. We’re making good progress on integrating these acquisitions. And we continue to identify opportunities to leverage our complementary technologies, leading brands, and deep applications expertise to provide superior benefits for our customers and long-term value for our shareholders. Now I’ll provide a summary of our performance and an update on the overall demand environment. I’m pleased with our performance this quarter as we delivered strong revenue growth and earnings per share that exceeded the high-end of our guidance. I’m very proud of the way our associates have continued to execute our strategy as they navigate a dynamic macro environment.

I’m truly grateful for the hard work of our over 9,000 employees around the world to shape what matters for tomorrow. Consolidated revenue for the quarter grew 22% primarily driven by our contributions from our recent acquisitions and robust organic growth in our APS segment. We continue to see strong order performance within APS including record orders for aftermarket parts and service. And we were encouraged by sequential order improvement within MTS, leading to another quarter of record total backlog. I’ll now spend a moment providing more detail on what we’re seeing across our end markets. Overall, the demand pipeline remains healthy across APS. And with MTS, we are seeing signs of improvement. That said we continue to experience a cautious approach by some customers, as the timing of investment decisions remained extended throughout the quarter.

Let’s begin with the MTS segment. We saw a sequential improvement in orders, revenue and margin in the quarter with a record level of revenue from our injection molding product line, as the teams did a great job of executing products from the backlog. But, as anticipated, orders remained soft across the segment, particularly for our higher margin hot runner equipment. We continued to see customer decision delays across key end markets and geographies. Order pipelines are improving and we do expect to return to a more normal demand environment as we move through the back half of the fiscal year. Along with that, we also expect to see a pickup in margins due to more favorable product mix, as the demand for hot runners improves over the next two quarters.

Now on to APS. Let’s start where we’ve made our most recent investments. First, with food. The order pipeline for new equipment is at a record level with strong demand outlook for North America and Europe, particularly in the areas of baked goods and pet food. While we did see some customer decision delays in the quarter, we continue to focus the business on pipeline development. The integration of LINXIS, Peerless and Gabler remains on track, and we continue to identify opportunities with customers to sell solutions that leverage the capabilities of our extended product portfolio. Turning to recycling. With the combination of our Coperion, extrusion and material handling systems, and our recently acquired Herbold shredding, washing and grinding equipment, we are in a unique position to provide complete plastics recycling solutions.

The exceptional receptivity from customers regarding the value we can provide continues to outpace expectations, and the pipeline of orders has grown rapidly. We are also starting to see the scale of these customer investments increase, particularly in Europe and North America, but we also expect to see strong demand in India and the Middle East over the quarters and years ahead. Our integration continues to progress as planned. And finally, our core and growth platform of durable plastics within our APS segment. As we’ve communicated over the past few quarters, we continue to see a strong investment cycle for polyolefin and engineering plastics. Demand remains stable in China and India and the Middle East remains an attractive region as well for growth, particularly for large polyolefin projects.

The scale of these projects continues to increase as customers look to maximize the efficiency of their investments. And this plays to our strengths as a leading global provider of high output, extrusion and material handling system. We’re also seeing strong demand for aftermarket parts and service, particularly in North America, which continues to indicate the critical need to support customers throughout the life of their equipment and systems. Overall, for APS, we continue to see good demand across our key end markets and we’re further bolstered by our record backlog heading into the second half of the fiscal year, which gives us visibility and confidence in our outlook as Bob will discuss in more detail later on the call. Moving forward, our teams are laser focused on deploying the Hillenbrand operating model to drive productivity in our operations and integrate our recent acquisitions, while also aggressively managing discretionary costs over the near-term.

We remain confident in the foundation we’ve built to drive long-term profitable growth and shareholder value creation. I’ll now turn the call over to Bob to provide a more detailed overview of our financial performance and outlook for the remainder of the year.

Bob VanHimbergen: Thanks, Kim, and good morning, everyone. Two brief reminders before I begin. First, I’ll be discussing our results on a continuing operations basis, which excludes Batesville. And second, I will be making organic comparisons that exclude the impacts of acquisitions, divestitures, and foreign currency exchange. Now turning to our consolidated performance on Slide 6. We delivered revenue of $691 million, an increase of 22% compared to the prior year, primarily due to acquisitions and higher aftermarket parts and service revenue. On an organic basis, revenue increased 9% year-over-year led by 11% organic growth within our APS segment. Adjusted EBITDA of $109 million increased 8% or 3% organically as favorable pricing and productivity improvements were partially offset by cost inflation.

Adjusted EBITDA margin of 15.7% decreased 200 basis points, primarily due to unfavorable product mix and the dilutive effect of the acquisitions. As we previously discussed, the recent acquisitions currently operate with lower relative margins. However, we do expect to bring these margins in line with historical APS margins over the next few years, as we drive synergies and productivity through the deployment of the Hillenbrand operating model. We reported GAAP net income from continuing operations of $24 million or $0.33 per share. Adjusted earnings per share of $0.74 increased $0.09, or 14% compared to the prior year, primarily due to pricing and productivity improvements, higher EPS volume, the impact of acquisitions, and fewer shares outstanding.

This is partially offset by inflation, unfavorable foreign currency exchange and higher interest expense. The adjusted effective tax rate in the quarter was 33.5%. We anticipate our full year tax rate to be approximately 31%, which is at the high-end of our previously provided range, primarily due to unfavorable geographic mix. We generated cash flow from operations of $50 million in the quarter, up approximately $65 million from the prior year, primarily due to favorable timing of working capital. Capital expenditures were $17 million in the quarter, and we returned approximately $15 million to shareholders through our quarterly dividend. As the supply chain environment normalizes, we continue to expect improvements in our working capital profile, particularly through lower inventory and through the reduction of unbilled receivables related to large projects.

We also anticipate that higher order volume will generate an increase in customer advances in the back half of the year, leading to stronger cash flow in the second half compared to the first half. We maintain our expectation that full year cash conversion will be in a range of 80% to 85% for fiscal 2023, while our longer term target remains at approximately 100%. Now moving to segment performance, starting with APS on Slide 7. APS revenue of $431 million increased 37% compared to the prior year, driven by acquisitions, higher aftermarket parts and service revenue and favorable pricing. Organic revenue increased 11% year-over-year. Adjusted EBITDA of $73 million increased 12% year-over-year or 2% organically as favorable pricing, higher volume and productivity improvements were partially offset by cost inflation and growth investments.

Adjusted EBITDA margin of 17% decreased 370 basis points, primarily due to the dilutive effect of the acquisitions, and an increase in growth investments. Margins for the acquisitions were a bit lower in the quarter than anticipated, primarily due to customer delays negatively impacting volume. As I mentioned earlier, we still expect to improve these margins towards historical segment levels over the next few years. Backlog of $1.67 billion, increased 30% compared to the prior year or 13% on an organic basis, primarily driven by increased orders for large plastics systems and record orders for aftermarket parts and service. As Kim mentioned, we are pleased with the robust pipelines in our key growth platforms of durable plastics, recycling and food, which we expect to translate into higher growth in the second half of the year.

Turning to MTS on Slide 8. Revenue of $260 million, increased 4% year-over-year or 7% organically as an increase in injection molding equipment, favorable pricing and higher aftermarket parts and service was partially offset by a decrease in hot runner equipment, which we anticipated coming into the quarter. Adjusted EBITDA of $48 million, decreased 6% or 2% organically, and adjusted EBITDA margin of 18.2%, decreased 190 basis points, primarily due to the elevated relative volume of injection molding equipment, which, as we’ve discussed, comes at a lower relative margin when compared to hot runners. As Kim mentioned, we expect this mix to normalize in the second half of the year, which will result in overall improvement in margins for the segment.

Backlog of $298 million decreased 29% compared to the prior year, primarily due to the execution of the existing backlog and lower orders for injection molding equipment. We delivered record revenue from our injection molding product line in the quarter, which is a testament to the team’s relentless focus on execution. The order softness we saw throughout the quarter was in line with our expectations, and we are seeing pipelines improve across most applications and geographies. We expect to see orders continue to pick up as we work through the remainder of the second half of the fiscal year. Turning to the balance sheet on Slide 9. Net debt at the end of the quarter was just under $1 billion, and our net debt to pro forma adjusted EBITDA ratio was 2.2x.

At quarter end, we had liquidity of approximately $1.1 billion, including $350 million in cash on hand and the remainder available under our revolving credit facility. I’d like to highlight that in June, we expect to make a tax payment related to the Batesville sale of approximately $150 million. Including this tax payment, our net leverage ratio will be approximately 2.5x as of the end of the second quarter, which is back within our targeted range of 1.7x to 2.7x. Turning to Slide 10. As many of you know, we have a strong track record of deleveraging following acquisitions, and we expect to continue this track record as we move forward, while maintaining the disciplined capital deployment strategy that is focused on profitable growth and shareholder value creation.

As we’ve consistently communicated, our capital deployment framework is based around four key priorities: driving profitable growth through attractive organic and inorganic investment opportunities, returning cash to shareholders through our attractive dividend policy, and opportunistic share repurchases, and maintaining an appropriate leverage profile with a target net leverage of 1.7x to 2.7x. As we make progress integrating our recent acquisitions, we continue to evaluate potential strategic acquisitions that strengthen our capabilities in key end markets, accelerate our profitable growth strategy and those that will provide a strong return to shareholders over the long term. Now moving to Slide 12. As we enter the second half of the fiscal year, we are updating our guidance based on performance in the first half as well as what we see in current demand and operating environment.

Our guidance now assumes slightly increased expected revenue of approximately $2.81 billion to $2.86 billion for the year, previously $2.77 billion to $2.86 billion. We are maintaining the midpoint of our adjusted EPS range while narrowing slightly to $3.30 to $3.50 per share from a previous range of $3.25 to $3.55 per share. Now turning to the segments. For APS, we are refining our expected annual revenue range to be $1.8 billion to $1.83 billion, previously $1.79 billion to $1.84 billion. Our assumption for underlying organic growth remains strong at approximately 10% to 12%. We are lowering our expectations for adjusted EBITDA margin to be in the range of 18.5% to 19%, previously 19% to 20%, primarily due to unfavorable product mix and the dilutive effect of price cost that has remained more elevated than anticipated.

This guidance reflects underlying organic margin expansion of 40 basis points to 90 basis points. For MTS, we are slightly raising our expected annual revenue range to be $1.01 billion to $1.03 billion, previously $980 million to $1.02 billion. We are maintaining our previous guidance for EBITDA margin in the range of 19% to 20% based on the expected product mix in the second half of the year. With the ongoing macro uncertainty, we are providing a Q3 guidance range for adjusted EPS, which we expect to be $0.88 to $0.94, which reflects year-over-year growth on a continuing operations basis of 28% to 36% and strong sequential improvements in both segments. Please review Slide 12 for additional guidance assumptions. 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. Since I became CEO nearly 18 months ago, we’ve significantly transformed Hillenbrand into a pure-play global industrial leader and our entire organization remains energized and excited about the opportunities that lie ahead. As we communicated at our Investor Day in December, our focus is to drive profitable growth and create long-term shareholder value through four key tenets: First, leveraging our leading brands with strong competitive positions in large and growing end markets; Second, enhancing our growth by leveraging our large installed base to drive profitable aftermarket expansion and by expanding our capabilities through strategic M&A; Third, utilizing the Hillenbrand operating model to drive sustained operational improvements, productivity and synergies; And finally, by deploying capital towards high-return opportunities and returning cash to shareholders through dividends and opportunistic share repurchase.

Finally, I’m pleased to highlight that we will publish our fourth annual sustainability report later this month, and we look forward to sharing our continued progress with you. Now we’ll open the line for questions.

Q&A Session

Operator: [Operator Instructions] And our first question is from the line of Daniel Moore with CJS Securities.

Operator: Our next question is from the line of Matt Summerville with D.A. Davidson.

Operator: [Operator Instructions] The next question is from the line of John Franzreb with Sidoti & Company.

Operator: Thank you. At this time, I’ll now turn the floor back to management for further remarks.

Kim Ryan : Great. Thanks again, everyone, for joining us on the call today. We appreciate your ownership and your interest in Hillenbrand and our transformation. We look forward to talking to you again in August when we will report our fiscal third quarter results. Have a great day. Thank you.

Operator: This will conclude today’s conference. You may disconnect your lines at this time. Thank you for your participation.