Hillenbrand, Inc. (NYSE:HI) Q4 2023 Earnings Call Transcript

Hillenbrand, Inc. (NYSE:HI) Q4 2023 Earnings Call Transcript November 16, 2023

Operator: Greetings and welcome to the Hillenbrand Fourth Quarter Fiscal Year 2023 Earnings Call. At this time all participants’ are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded. I would now like to turn the call over to your host Sam Mynsberge, Vice President, Investor Relations for Hillenbrand. Thank you, you may begin.

Sam Mynsberge: Thank you, operator. Good morning, everyone. Welcome to Hillenbrand’s fourth quarter and fiscal 2023 year-end earnings call. I’m 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. Turning to slide three. A reminder that our comments may contain certain forward-looking statements that are subject to the safe harbor provisions of the securities laws. These statements are not guarantees of future performance and our actual results could differ materially. Also during the course of this call, we will be discussing certain non-GAAP operating performance measures, including organic comparisons for our segments, which exclude the impacts of acquisitions, divestitures and foreign currency exchange.

Additionally, 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. I encourage you to review the appendix in slide three 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. Thanks for joining us today as we review our fiscal 2023 and provide our outlook for fiscal year 2024. I’d like to start by recognizing our associates for their resiliency and dedication throughout the year as we executed our strategy and significantly transformed Hillenbrand through the completion of three strategic acquisitions and the divestiture of our legacy death care segment. Their commitment and diligence made that transformation possible. These actions have strengthened the foundation for Hillenbrand’s long-term success as a pure play global industrial company, now characterized by a portfolio of leading brands and highly engineered industrial processing technologies and solutions serving a variety of industries, including durable plastics, food, and recycling, which we believe are supported by long-term secular growth trends.

Most notably, with the completion of Schenck Process Food and Performance Materials, or FPM, on September 1, we’ve now increased the scale of our food and pharma business to roughly $800 million on a proforma 2023 basis, up nearly ten-fold from what we had in 2022. This attractive end market leverages the systems and applications engineering expertise and the technological capabilities that are at the core of what we do well at Hillenbrand and build upon this backbone of products, process, and portfolio. Additionally, we believe these acquisitions provide us a less cyclical growth platform as we move forward. While we’re still in early innings of the integrations for these acquisitions, the businesses have been performing ahead of our expectations, and the teams are absolutely energized by the opportunities that lie ahead to create significant value for our associates, our customers, and our shareholders.

Now turning to our performance. We finished the year by delivering strong margins in APS and adjusted earnings per share in the quarter at the high-end of our guidance range. Revenue in the fourth quarter was in line with our expectations. Additionally, we added a one-month contribution from FPM as a result of our September 1 close. We continued to face a soft order environment for capital equipment in our MTS segment, and we experienced ongoing customer decision delays for several large projects within our APS segment. APS orders did improve modestly on a sequential basis, including winning a record order in our recycling business of nearly $30 million in the quarter. We’re excited to continue to build on this momentum as we move through 2024.

I also want to congratulate our recycling team for recently being selected as the first place winner from over 100 companies considered for the Stuttgart Innovation Award for Sustainability, related to our recycling technologies. We’re thrilled to be recognized for the strong technological capabilities we can provide our customers in this exciting end market where we see significant growth potential over the coming years. Building upon the momentum we’ve seen throughout the year, our recently acquired food businesses continue to deliver strong performance, as did our aftermarket business with record quarterly aftermarket revenue in both segments. Our operating cash flow was below expectations, primarily driven by the continued push out of large orders and the corresponding customer advances.

However, we made continued headway in reducing inventory and unbuilt customer receivables, highlighting the ongoing execution of our Working Capital Improvement Initiative. For the full-year, we grew consolidated revenue by 22%, driven by acquisition performance and robust organic growth of 9% in our APS segment. This growth was partially offset by a 2% decline in our MTS segment, primarily driven by lower revenue for our hot runner equipment, which persisted throughout the year. While the pipeline of customer inquiries and projects remain solid across our key product categories, the global economic and geopolitical environment continues to pose a challenge to the timing of some customer decisions, and we are entering the year with lower organic backlog levels, compared to the record levels we saw entering fiscal 2023.

As a result, we are being grounded in our 2024 demand outlook, which Bob will cover in more detail later in the call. Nevertheless, we firmly believe we are well positioned for long-term growth with our leading brands and technologies, and we remain focused on controlling what we can by executing our backlog, driving innovation and productivity initiatives, and integrating our recent acquisitions to accelerate costs and commercial synergies. Before I turn the call over to Bob, I’d like to take a moment to reflect on another key accomplishment this year. This past May, we published our fourth annual sustainability report showcasing how our organization has embraced our purpose, shaped what matters for tomorrow, and furthering our commitment to transparency by disclosing our Scope 3 emissions, water usage, and approach towards reducing our emissions.

I’m proud of the progress we’ve made on these critically important efforts, exemplified by the recognition we’ve received in our most recent upgrade by MSCI to a AA rating and in being named a finalist in the Reuters Responsible Business Awards for our Purpose Launch. With that, I’ll now turn the call over to Bob to cover our financial performance and our outlook.

Bob VanHimbergen: Thanks, Kim, and good morning, everyone. Turning to our consolidated fourth quarter performance on slide seven, we delivered revenue of $763 million, an increase of 26% compared to the prior year, primarily due to acquisitions, including $43 million from FPM for the month of September. On an organic basis, revenue decreased 1% year-over-year, as 7% organic growth in APS was offset by an 11% decline in MTS, driven by the order softness we experienced throughout the year. Adjusted EBITDA of $147 million increased 33% or 3% organically, as favorable pricing, productivity improvements, and lower variable compensation were offset by cost inflation and lower MTS volumes. We delivered strong adjusted EBITDA margin of 19.3%, an increase of 90 basis points over the prior year, despite lower organic volume.

We reported GAAP net income of $17 million, down from $31 million in the prior year, primarily due to an increase in acquisition and integration-related costs, including tax expenses. Adjusted earnings per share of $1.13 came in at the higher end of our expectations, up 45%. This figure included a net contribution of approximately $0.02 from FPM. Our adjusted effective tax rate in the quarter was 28.4%. We generated capital from operations of $73 million in the quarter, which was flat to the prior year. Capital expenditures were $23 million in the quarter. Then we returned approximately $15 million to shareholders through our quarterly dividend. Now moving to segment performance, starting with APS on slide eight. APS revenue of $516 million increased 57%, compared to the prior year, primarily driven by acquisitions, favorable pricing, and higher aftermarket parts and service revenue.

Organic revenue increased 7% year-over-year. Adjusted EBITDA of $118 million increased 72% year-over-year, or 23% organically, as favorable pricing, productivity improvements, higher volume, favorable product mix, and lower variable compensation were partially offset by cost inflation. We delivered strong, adjusted even a margin in the quarter of 22.8%, which was up 190 basis points over the prior year. Backlog of $1.9 billion increased 34%, compared to the prior year, driven by acquisitions. On an organic basis, backlog decreased 9%, due to lower orders for large plastic systems, primarily resulting from the continued customer decision delays on several large projects. Sequentially, backlog increased 16% driven by the acquisition of FPM. We continue to see a healthy level of new product inquiries and full utilization of our test facilities across our key growth platforms of durable plastics, food, and recycling.

Though as we previously communicated, we have seen an elongation of customer decision timing, particularly within the large plastic systems projects in Asia and the Middle East. We continue to monitor this closely and remain focused on improving our lead times and executing our existing backlog to keep us well positioned for when customer order patterns normalize. Turning to MTS on slide nine, revenue of $247 million decreased 10% year-over-year, due to lower volume for injection molding and hot runner equipment. Adjusted EBITDA of $46 million decreased 23%, largely driven by lower volume and cost inflation. The adjusted EBITDA margin of 18.5% decreased 310 basis points, compared to the prior year, primarily due to cost inflation, impact of volume, and unfavorable product mix.

We continued to experience softness in our higher margin hot runner products as China remained relatively slow, and we saw additional weakness in North America. As a result, the mix headwind was greater than we anticipated coming into the quarter. Backlog of $233 million decreased 36%, compared to the prior year, primarily due to the execution of the existing backlog and decreased orders for injection molding equipment. Quarter volumes persisted at a relatively low level throughout the quarter, but were stable to what we experienced in Q2 and Q3. The teams remain focused on managing discretionary costs and driving productivity, and we’re confident that we’re well positioned to return to growth as demand recovers. I’ll discuss our outlook for fiscal ‘24 further in a moment.

I’ll briefly cover full-year results on slide 10. As a reminder, these results include one month of FPM performance. Consolidated revenue of $2.83 billion increased 22% over the prior year, or 4% organically, as APS grew 9%, while MTS decreased 2%. Adjusted EBITDA of $483 million increased 20%, compared to the prior year, or 4% on an organic basis, as favorable pricing, productivity improvements, higher APS volume, and lower variable compensation were partially offset by cost inflation, an increase in strategic investments, and lower MTS volume. Adjusted EBITDA margin of 17.1%, decreased 20 basis points, primarily due to the dilutive effect of price-cost coverage. GAAP net income from continued operations was $107 million, down 2% from the prior year.

Adjusted net income of $247 million resulted in adjusted earnings per share of $3.52, an increase of 31%, largely due to the impact of acquisitions. The adjusted effective tax rate for the year was 29.5%. Total backlog of $2.1 million increased 19%, primarily due to nearly $520 million of Linxis and FPM backlog that we didn’t have coming into the year. Organically, backlog is down 14%, due to the lower orders in MTS and the delay of large projects within APS, which will be a challenge for MTS heading into fiscal ‘24 and a headwind to large systems revenue for APS. We generated full-year operating cash flow of $207 million, up $144 million, compared to the prior year. The higher earnings and reductions in inventory, unbilled receivables were partially offset by unfavorable timing, accounts payable, and customer advances, and an increase in business acquisition and integration costs.

Capital expenditures for the year were $69 million, and we returned approximately $61 million to shareholders through our quarterly dividends. As Kim highlighted, we have sustained improvement in our inventory levels and unbilled receivables throughout the year. However, our cash flow is lower-than-anticipated coming into the quarter as the delay in order intake continued to negatively impact our customer advances and we had some timing impact related to the September 1 close of FPM. Given the ongoing macro uncertainty around the world potentially impacting timing of orders combined with integration and synergy achievement related costs, we expect our cash conversion to be approximately 90% in fiscal ‘24, with Q1 to be expected of modest outflow cash, which is consistent with our typical cadence.

With that said, we’re still confident in our longer-term ability to generate cash flow at or greater than net income. Turning to the balance sheet on slide 11, net debt at the end of the quarter was $1.77 billion and our net debt to proforma adjusted EBITDA ratio was 3.2 times, which was in line with our expectations following the close of FPM. At quarter end, we have liquidity of approximately $718 million, including $243 million of cash on hand, and the remainder under — available under our revolving credit facility. Our weighted average interest rate for the quarter was approximately 5%. Turning to capital deployment on slide 12, 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 attractive and growing dividend and opportunistic share repurchases; and maintaining an appropriate leverage profile with a target net leverage range of 1.7 times to 2.7 times.

Over the near-term, we continue to prioritize debt reduction with the goal of returning to within our net leverage targets by the end of the first quarter of fiscal 2025, which is consistent with what was previously communicated. We expect M&A to be — to continue to be an important part of our long-term strategy as we look to strengthen our capabilities in key end markets, accelerate our profitable growth, and provide long-term value to our shareholders. However, our current focus is on integrating our recent acquisitions and deleveraging to our targeted range. Let me conclude my prepared remarks with our fiscal ‘24 outlook on slide 13. Our guidance for fiscal 2024 reflects the continued uncertainty in the global macro environment and the potential impact it may have on the timing of orders throughout the year.

With that, we anticipate total company revenues of $3.28 billion to $3.44 billion, up 16% to 22%, compared to the prior year, driven by the acquisition of FPM and solid organic growth in our EPS segment, partially offset by year-over-year decline in the MTS segment as a result of lower order trends we experienced in 2023. We expect adjusted EBITDA to be in the range of $530 million to $588 million, up 10% to 22%, and adjusted earnings per share of $3.60 to $3.95, reflecting 7% growth at the midpoint of the range. We’re assuming interest expense of approximately $150 million for the year, up versus the prior year due to the debt associated with the FPM acquisition. We expect our adjusted effective tax rate to be in the range of 28% to 30% for the year.

I’ll now touch on cash flow and leverage. As I mentioned earlier, we’re targeting our cash flow conversion to be around 90% for 2024, inclusive of approximately $20 million of anticipated integration costs and cost to achieve synergies. While the cash flow will continue to be lumpy on a quarter-to-quarter basis, we remain confident and highly focused towards achieving our deleverage goal of returning to within our guardrails by the end of Q1 2025. Now I’ll quickly touch on our segment outlook. For APS, we anticipate revenue of $2.4 billion to $2.5 billion, up 32% to 37%, largely due to the full-year impact of FPM. We expect organic growth of 3% to 8%, with strong performance expected in food, recycling, and aftermarket. We are taking a more cautious approach towards our large plastic systems revenue due to the customer order delays we’ve experienced over the last couple of quarters.

But as we mentioned, we still see a healthy level of customer activity and believe our capabilities remain best-in-class for providing full system solutions and service to customers anywhere in the world. We expect adjusted EBITDA margin to be 18% to 19% down from the prior year, due to the dilutive effect of FPM, which as a reminder comes in at around 13% margin. Given the successful start to our integration, we are highly confident in our ability to drive significant margin expansion over the next few years. Organically, our guidance reflects moderate year-over-year margin expansion, driven by volume, synergies, and our continuous improvement initiatives. Now turning to MTS, as Kim mentioned, we are entering this year with a significantly lower backlog, compared to a year ago, which puts pressure on the full-year revenue, particularly in the first-half of the year.

While orders have stabilized over the last few quarters, we are being cautious towards continuing macro uncertainty. As a result, the low-end of our range does not assume an improvement in these order patterns, while the high-end expects a modest uptick in orders in the back half of the year. We are not assuming orders return to normalized level this year in our current guidance range. We are targeting an adjusted EBITDA margin of 18.5% to 19.5% reflecting about 30 basis points of margin expansion at the midpoint, as we focus on executing productivity and continued cost actions to help mitigate the macro headwinds. For Q1, we are providing a guidance range of adjusted EPS, which we expect to be $0.66 to $0.71. This is in line with our typical seasonality and reflects moderate organic growth in EPS and approximately $0.06 of net contribution from FPM offset by the expected volume decline in MTS.

Please review slide 13 for additional guidance assumptions. With that, I’ll turn the call back over to Kim.

Kim Ryan: Thanks, Bob. As we enter 2024, we continue to experience a dynamic operating environment. In light of this, I’m all the more confident in the strategic actions we’ve taken to position Hillenbrand for long-term success by expanding our presence in higher growth, less cyclical end markets. We’ve already seen traction through the strong performance these acquisitions have delivered so far. As we progress in our integration, we’ve seen excellent collaboration across the APS segment as we continue to identify significant opportunities to drive commercial and operational synergies, and we’re looking forward to sharing more details in the coming quarters. Additionally, we remain relentless on driving operational improvements within MTS in response to the challenging cyclical demand environment.

I’m excited by our previously announced edition of Tammy Morytko as President of the MTS segment. Tammy brings significant global leadership experience and will be focused on continuous improvement and positioning the segment for a return to growth once demand recovers. Finally, I want to again thank our teams for all of their efforts throughout fiscal 2023 in transforming Hillenbrand into a pure play, global industrial leader of highly engineered processing equipment and solutions. I’m very proud of our achievements so far and firmly believe we have significantly more opportunity still ahead. With that, we’ll now open the line for your questions.

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Q&A Session

Operator: Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Daniel Moore with CJS Securities. Please proceed with your question.

Daniel Moore: Thank you, good morning, Kim. Good morning, Bob. Thanks for all the color.

Kim Ryan: Good morning, Dan.

Daniel Moore: Maybe start with, can the integration 2.5 months in with FPM, maybe drill down a little bit, excuse me, on what you’re seeing there, as well as an update on link system peer lists, and then somewhat related but separate, just what’s embedded in your fiscal ‘24 guide for shank from a — for FPM, I should say, from a revenue and EBITDA perspective?

Kim Ryan: Okay, I’ll let Bob take the second part of your question. But relative to the integration, we are 2.5 months in, I think we are even more excited about what we found here. I mean, we’ve looked at this, we’ve looked at FPM for a long time. We were excited about the opportunities that we thought we saw there. I think as we bring these teams together, we see even more opportunity than we did during the due diligence. And I think we see a tremendous opportunity for us to leverage what we learned during the integrations of Coperion and then Milacron and the scalable foundation that we’ve built over the last couple of years to be able to move quickly in creating value for not only FPM, but obviously also Linxis and Peerless as we bring them into the portfolio as well.

They were already underway on the integration, so we’ve really been folding FPM into an in-flight integration. But I’m really, really excited about the way these teams are coming together. We’ve been able to launch some regional integration meetings. We’ve been able to bring these teams together to begin talking about not just cost opportunities, but commercial opportunities, to begin thinking about how we can mesh these cultures and identify future ways for these teams together. I think we’ve even seen ways where we can bring, rather than just Coperion, we can even bring other parts of APS, specifically Rotex, into the equation to be a part of these solutions as well. So we are, I think, I speak for the entire team to say we are really thrilled with the talent, the capabilities, and the energy and engagement that we’ve seen from these teams as we bring them together.

Now I’ll let Bob take your question about the what’s built into ‘24.

Bob VanHimbergen: Yes, thanks, Kim. So, Dan, so just a reminder, we had about $43 million of revenue in the month of September with the September 1 close of Schenck, and that’s contributed about $0.02 into the year. So if you think about incremental in fiscal ‘24, we have in guidance, it’s about an incremental revenue of about $520 million to $530 million. Reminder margins were about 13%. We see that ticking up a bit in 2024. I’d also remind you that the food businesses in total have performed better than we’d expected internally. And then, as Kim mentioned, we’ve had some great meetings so far and a lot of excitement. And so I think as we continue to work on some of those opportunities, hopefully we can continue to move that margin up here by the end of ‘24, maybe into ‘25. But so margins are a little above 13%, I would say, and then, you know, incremental EPS it’s probably in that $0.25 to $0.30 range.

Daniel Moore: That’s helpful. It sounds like solid mid-single-digit growth then organically from the numbers you put out at the acquisition. Maybe talk, go ahead, I’m sorry.

Bob VanHimbergen: No, that’s right, that’s right.

Daniel Moore: Yes, okay. And of the $20 million cost synergies, how much is embedded in the fiscal ‘24 guide and how much is left for beyond? And then, Kim, in terms of potential upside, I won’t ask you to quantify, but are you seeing more opportunity on the offensive side of the ball or kind of defensive on a go-forward basis relative to your initial expectations?

Bob VanHimbergen: Yes, I’ll take the first one. Yes, so there’s probably, I’d say, Dan, about $7 million to $9 million of cost synergies only that we have embedded in our guidance. But again early days, but we’ve got some excitement here to hopefully move that number up. And by the way, accelerate some of the savings we have beyond that, which is probably another, call it $10 million to $15 million, we think about the Linxis and Schenck acquisitions, you know, kind of a runner rate. You know, we’re looking to certainly accelerate some of those.

Kim Ryan: I would say on the commercial side is what I assume you’re referring to, Dan, on the offensive side when you ask your question. But I would say that the teams are already coming together. In fact, they were running out in front of even our integration work streams in wanting to collaborate on certain opportunities that they saw. I think we’ve announced a couple of opportunities that we were able to take advantage of between Linxis and Coperion that neither company would have been able to achieve on its own. We are seeing similar opportunity on the FPM side by bringing in other parts of the portfolio, whether it’s parts of the Linxis Group, the Legacy Coperion, or even Rotex that they’re bringing into solutions that they’re offering to customers. And we’re already beginning to bring those things together and start presenting those to customer opportunities, so more to come on that.

Daniel Moore: Okay, one more for me, I’ll jump out. On the APS side, still backlog down 9% organically. Just what are you hearing from customers, particularly on the plastic side, what gives you confidence that the delays are simply timing related? I’ll stop there.