Q4 2019 Earnings Call
This call will be available until midnight Eastern time November 28, 2019 by dialing one 800 585 feet 367 toll free in the United States in Canada for first one for 166 to one for six four to internationally and using the conference I'd now.
For 204 to five six this webcast will be archived on the company's website at <unk> Dot Hillenbrand Dot com through December 13th 2019.
If you ask a question during today's call. It would 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.
At this time, it's my pleasure to turn the call over to Rich Dudley director of Investor Relations Mr. Douglas. Please go ahead.
Thank you operator, good morning, everyone and welcome to Hillenbrand fourth quarter fiscal 2019 conference call.
Joined fire, President and CEO , Joe Raver, along with our senior Vice President and CFO Kristina Cerniglia.
During today's call will discuss fourth quarter and full year financial result, the outlook for our businesses for fiscal year 2020, and will provide an update on or pending acquisition of milacron.
Well then open the call up for Q in it.
Well, we recognize there's a lot of interest and Milacron's performance, we remain separate companies until closing.
Well not be addressing any questions regarding their future outlet order quarterly result, and we appreciate your focusing your questions on hillenbrand specific topics.
He gets the result, let me remind you that our comments may contain certain forward looking statements that are subject to the safe Harbor provision of the securities laws.
These statements are not guarantees of future performance and our actual results could differ materially.
Also during the fourth of this call will be discussing certain non-GAAP operating performance measures.
I encourage you to take a look at slides three and four of the slide presentation, and our 10-K, which can be found at our website for a deeper discussion I'm transaction related matters forward looking statements and the risk factors that could impact or actual results.
Now I'd like to turn the call over to Jim.
Thanks, Rich good morning, everyone.
Our vision at Hillenbrand is to build a world class global diversified industrial company with a proven a record of success driven by the Hillenbrand operating model.
Our mission is to create exceptional value for our customers provide great professional opportunities for our employees PV responsible the communities in which we operate.
And deliver value to our shareholders.
Our profitable growth strategy has four key pillars.
First as a strengthened and build business platforms to achieve scale, both economically and in the marketplace.
The second is to build a scalable foundation for growth utilizing the hillenbrand operating model.
Third as to run Batesville for cash flow.
And the fourth is to effectively deployed that strong free cash flow to create shareholder value.
We made progress executing our strategy in fiscal 2019.
And finished the year with solid fourth quarter financial results, including record revenue and adjusted earnings per share.
We're encouraged by the continued growth in large polyolefins systems at Coperion as well as Batesvilles resiliency in delivering healthy margins and cash flow in a challenging demand environment.
During the year, we completed the successful integration of be Eminem screening solutions within our separation business and now we're preparing to integrate milacron, which is the largest acquisition in our history and which represents the next major step in our transformation.
The milk on acquisition is very well aligned with our strategy.
Requiring good businesses with leading brands and strong technology.
We're adding two sizable platform businesses to our portfolio, which along with our Coperion business will be our main focus for future investment and growth.
In the near term, we expect to achieve $50 million and run rate cost synergies by the end of year three we get the benefits of scale related to redundant public company costs procurement and other operational efficiencies driven by the application of the Hillenbrand operating model.
And over the medium to longer term, we expect to drive revenue synergies through cross selling and shared innovation.
As you may have seen a couple of days ago Milacron reported their fiscal third quarter results. The show the impact from industry headwinds the effects of the global slowdown and trade tensions.
Not very different from some of the challenges that we are facing in parts of our business.
And that we have managed through effectively in the past.
Milk on third quarter earnings do not change our belief that this is a highly strategic long term transformational acquisition.
We remain confident in achieving $50 million and targeted cost synergies and creating long term shareholder value.
For those of you unfamiliar with Milacron, Let me give you a quick snapshot, who milacron is and why we're excited about the opportunity ahead of us.
Milacron as a global leader in highly engineered and customize systems and plastic technology and processing with more than $1 billion in annual revenue.
We have strong industry positions and brands and in particular are recognized as a leader in hot runner systems injection molding equipment and metal working fluids.
Milacron operates in three segments.
First is the melt delivery and control systems business or MDC, yes.
And Dcs designs and manufactures highly engineered technically advanced hot runner and process control systems mold bases and components.
Milacron is well known for its mold Masters brand, which is a global leader in industries that Sir.
Second is the advanced plastics processing technologies business or a ppt eight ppt designs and manufactures plastics processing equipment and systems, including injection molding extrusion and auxiliary systems under the Milacron brand.
And injection molding equipment Milacron has a recognized leader in North America and India.
And third as the fluids business operating under the same cool brand Sim cool provides metalworking fluids that help its customers reduced production cost, it's a strong business with attractive financial metrics and a global presence.
We continue to believe in the compelling strategic merits of the deal, we expect hillenbrand and milacron will be stronger together.
We think there's an untapped opportunity for hillenbrand to become a leader across the plastics value chain with expanded capabilities and increased global scale.
Today, we are strong and base resin production and engineering plastics, and we have emerging capabilities and extruded products and recycling.
Milacron will expand our product offering in these areas and extend our reach into durable plastics processing will plastics is shaped end to end products.
We believe that our deep expertise across all these processes will foster innovation and enable us to capitalize on emerging trends across the industry, including innovations and biodegradable plastics and recycling.
We expect demand for plastics to continue to grow over the long run.
Our chicken industries that are increasingly recognizing the benefits of durable plastics, including automotive as lightweighting becomes more critical with demand for more fuel efficient and electric vehicles.
Consumer goods in construction, where plastics improve durability and required less maintenance.
And medical products with an increased focus on safety improve drug therapy delivery and durability.
It's important to highlight that milacron's equipment is more focused on durable plastic products rather than single use products.
Since we announced the proposed combination in July we've made substantial progress towards closing the transaction, while diligently planning the integration process and day one readiness.
We have our best people, leading the integration and have also partnered with a leading consulting firm to provide structure and oversight.
We kicked off the process with a development of a centralized integration management office.
Led by our Vice President of the Hillenbrand operating model, Jim Hooven and dedicated integration teams across key functional areas. These teams are working on day, one through day 100 readiness, the combined organizational model and structure.
And synergy achievement.
In short, we're preparing to hit the ground running on day one.
The structure, we've set up enables us to remain focused on running our core businesses.
Dedicated integration teams drive synergy realization.
As a reminder, we expect to generate annualized run rate cost synergies of approximately $50 million within three years.
With a significant portion coming from reduced public company costs.
Our two companies are highly complementary with limited commercial overlap. So we expect minimal disruption to the core businesses as we execute our synergy plans.
We're confident in our ability to effectively integrate and help make the combined businesses better we've done this before with our successful acquisition of Coperion and.
And we think we can apply that experience here.
We will share additional details on progress after the transaction has closed and in subsequent earnings calls in terms of timing, we received all reasonably anticipated regulatory approvals for the transaction.
The completion of the merger is also conditioned on the approval of Milacron's shareholders.
We look on us holding a special meeting on November twentyth to seek their approval.
In addition to the shareholder vote, there are certain other customary conditions that need to be met in order to close while we don't anticipate any issues, we can't predict with certainty satisfaction of these conditions, nor the specific timing of the close the merger agreement provides that the transaction is to close within three business days.
Of all conditions being satisfied.
And that we're focused on running the business and delivering a seamless transition for all customers will be monitoring the integration and I would personally ensure that we maintain an acute sense of urgency to address any issues that may arise.
Our team understands the significant other work ahead, we can't wait to get started.
With that let me now turn to our results.
As you may have seen in our press release, we delivered record revenue record earnings and strong operating cash flow for the quarter.
Turning to the process equipment group.
As we've seen throughout the year plastics remains a bright spot even as other industrial end markets continued to face sluggish demand.
The outlook for new Polyolefin projects remains positive with capacity expansion expected to continue in the U.S. and Asia.
We believe we are well position to win at least our share of announced projects, we have deep applications expertise and the unique ability to provide comprehensive end to end solutions for large polyolefins systems competitive advantages, we credit for making us the partner of choice for some of the largest most challenging projects in the.
A world.
We continue to deliver innovative solutions to meet our customers demand for higher volume more efficient equipment.
In addition, we are making our extruders and compounding machines smarter with features like digital diagnostic and monitoring functions that contribute to increase productivity and customer value.
These innovations have also help coperion when aftermarket business our customers appreciate the expertise, we bring when performing service or modernizing plants to ensure they maintain optimal system throughput efficiency and uptime.
We believe our growing installed base represents a significant opportunity to capitalize on the aftermarket business in the future.
Moving to the engineered plastics part of the business demand for equipment remained stable over the past quarter and our long term outlook remains positive.
We currently see softness driven by reduced demand in the automotive industry, but that softness was partly offset by investment in capacity for specific types of classics, such as ABS and polycarbonate.
In food and pharmaceutical applications.
We finished the year with modest growth.
In general we've seen stability in these markets.
Although there has been limited activity around large projects recently.
We're focused on continuing to grow by leveraging our technical capabilities and applications expertise.
In addition to introducing innovative new products.
For example.
Coperion K Tron recently introduced its next generation feeding technology ideally suited for high value applications, requiring high levels of accuracy. These markets remain attractive and we believe there's solid growth potential for the future as expected the other industrial businesses in the process equipment group continued to face slow.
This demand in the fourth quarter.
Capital equipment sales were down year over year, driven by slowing demand and Proppants mining and forest products.
Parts and service revenue grew modestly in the quarter, even in the face of unfavorable comparisons and profits.
And flow control, we continue to feel the effects of the slowdown in the mining and industrial markets in the us in Europe .
The other hand, we've seen some encouraging signs of activity picking up in municipal markets.
In total the full control businesses delivered modest sequential improvements in both revenue and order volume in the fourth quarter.
Overall for the process equipment group, we continue to see good momentum in large capital projects for plastics coming out of the fourth quarter.
Going into the new fiscal year, we have a strong backlog and robust pipeline of new polyolefin projects.
However, other industrial end markets face continued weakness in the current challenging macroeconomic environment.
Kristina will discuss these implications for our fiscal 2020 guidance later in the call.
Now, let me comment on Batesville.
Our strategy for the Batesville business is to build on our leadership position and leverage the hillenbrand operating model to run the business as efficiently as possible and generate strong predictable cash flow to fuel hillenbrand's growth initiatives.
Those of you who are familiar with the business I understand that batesville is facing secular decline and burial casket demand primarily due to the estimated increase in the rate at which families opt for cremation.
Revenue was essentially flat in the fourth quarter compared to the prior year, despite lower burial demand and was at the low end of our expected range for the full year.
Margin performance was solid for the quarter as Batesville realized productivity gains and the benefits of targeted restructuring actions undertaken last quarter.
We continue to employ the hillenbrand operating model to help manage the business in a declining demand environment and we're continuing working to improve efficiency reduce costs and operate a lean and flexible organization before turning the call over to Christina Let me briefly discuss hellenbrand signing of the United Nations Global compact in late.
September we've taken a voluntary pledged to develop and execute corporate responsibility programs and to increase disclosures of our sustainable business practices.
We join over 9500 other companies to more closely align our business strategies to universally accepted principles in the areas of human rights labor environment and anti corruption.
Being responsible corporate citizen is embedded in our mission in core values and we look forward to increasing our commitment to the you NGC principles.
I'll now turn the call over to Christina for more detail on our results and guidance Christina Thanks, Joe and good morning, everyone.
Ill start with our fourth quarter results.
We reported total revenue of $486 million for the quarter, an increase of 2% over the prior year.
Excluding FX revenue grew 4%.
Growth was driven primarily by the process equipment group, increasing 3%, which includes 1% from the acquisition of the Eminem.
Batesvilles revenue was essentially flat year over year.
Adjusted EBITDA of $87 million increased 7% over the prior year and adjusted EBITDA margin of 17.9% expanded 80 basis points, primarily driven by pricing and productivity improvement.
Which more than offset product mix and cost inflation.
I will provide more details about our margin performance when I review segment results.
GAAP net income of $25 million or 39 cents per share was down 31 cents per share compared to last year, largely as a result of acquisition cost and restructuring charges.
These costs were approximately $31 million in total for the fourth quarter compared to $2 million in fiscal 2018.
Adjusted net income of 48 million or 76 cents per share increased nine cents or 13% year over year.
The adjusted effective tax rate for the quarter with 26.7%.
We generated solid operating cash flow of $69 million in the quarter that was about $23 million lower than last year's fourth quarter, primarily due to acquisition and integration costs.
We also returned $13 million to our shareholders in the form of cash dividends.
Turning to the next slide let me cover segment performance beginning with the process equipment group process equipment group revenue of $350 million grew 3% compared to the prior year.
Excluding the impact of foreign currency exchange revenue increased 6%.
Revenue growth was primarily driven by continued demand for large extrusion systems for plastics production.
That growth was offset by softness and capital equipment sales across other industrial end markets, where we experienced slower demand with some projects pushing out.
The parts and service business grew 3% in the quarter or 5%, excluding foreign currency exchange.
Adjusted EBITDA margin of 19% increased 70 basis points.
Primarily as a result of pricing and continued productivity improvement driven by strategic sourcing initiatives and targeted restructuring actions.
This margin was partially offset by the increased proportion of lower margin large system projects and by cost inflation.
As expected, we continued to see a higher proportion of large polyolefin system projects, which carry a lower margin and a lower proportion of mineral separators used to screen profit.
We expect this trend to continue as we head into fiscal year 2020.
And while large systems projects create some margin pressure over the short term the growing installed base of these system leads to new opportunities for higher margin parts and service revenue in the future.
Order backlog of $864 million at the end of the fourth quarter increased 6% over the prior year or 10%, excluding the negative foreign currency impact.
Backlog decreased 8% sequentially compared to the third quarter largely as a result of the timing of large system.
These systems projects continue to comprise about half of the backlog and are expected to contribute to revenue over the next several quarters.
As Joe mentioned, we have a favorable outlook of the polyolefin project pipeline with continued investment in new capacity expected in the U.S., China and other parts of Asia.
We see this is a great opportunity to continue expanding our installed base of polyolefin production system.
Moving to the Batesville business Batesville revenue of $136 million was essentially flat compared to the prior year, despite lower demand for burial casket.
Adjusted EBITDA margin of 22.6% was 150 basis points higher than the prior year, mainly driven by pricing and productivity gains, which more than offset cost inflation and lower volume.
Joe mentioned, we started to see the benefits of targeted restructuring actions, we commenced last quarter to help stabilize the margin.
Batesvilles adjusted EBITDA margin for the full year with 21.4% and we expect the business to be in the range of 20% to 21% in the fiscal year 2020.
Moving to annual results consolidated revenue of $1.8 billion grew 2% or 5%, excluding the impact of foreign currency.
This is equipment group revenue of $1.3 billion increased 5% or 8%, excluding FX as demand for plastics projects remains strong throughout the year.
The growth in the process equipment group was partially offset by lower demand for burial caskets and Batesville segment.
Batesvilles revenue of $533 million was down 3% for the year.
The acquisition of be Eminem screening solutions in November of 2018 contributed approximately 1% to revenue growth.
Net income of $121 million increased 59%, resulting in GAAP earnings per share of $1.92.
The increase was mainly driven by non cash goodwill and tradename impairment charges taken in the prior year that did not repeat.
Partially offset by higher acquisition costs and restructuring charges.
On an adjusted basis net income of $155 million resulted in adjusted earnings per share of $2.45 an increase of 1%.
We delivered that earnings growth in the face of a 3% foreign currency headwind and a higher adjusted effective tax rate.
Our adjusted effective tax rate of 26.9% for the full year increased 100 basis points compared to the 25.9% in 2018, primarily due to the unfavorable geographic mix of pre tax income.
Operating cash flow of $179 million was $69 million lower than the prior year, primarily due to expenses related to the acquisition of milacron, and an increase of $14 million and cash paid for taxes.
Our free cash conversion rate was approximately 122% of net income for the year.
We continue to leverage the hillenbrand operating model to drive greater efficiency across the business.
With focused execution of working capital initiatives, we delivered working capital turns of approximately nine times for the year.
During the year, we also returned $53 million to shareholders in the form of quarterly dividends.
In terms of our capital allocation priorities, we said that our priorities are reinvesting in our business, both organically and inorganically to accelerate profitable growth.
The Milacron acquisition is a key strategic investment and advancing our vision.
As we announced on October 11th we've completed the financing necessary to fund the transaction, which includes two term loan commitments totaling $725 million under our credit agreement and $375 million a 4.5% senior notes due in September of 2026. In addition to net proceeds from.
This offering and borrowings from the term loan we intend to use our revolver to fund the transaction our leverage remained low in the fourth quarter, finishing with net debt to EBITDA of 0.75 turns keeping us in a good position as we prepare to close the transaction.
As we've mentioned in the past, we expect our pro forma net leverage to be approximately 3.6 times, depending on the timing of the clothes.
We will then focus on aggressively paying down debt with goals to get below 2.75 times within 12 months and retain our investment grade credit rating.
We're confident in our ability to rapidly pay down debt and return to our targeted leverage.
We have a good recurring revenue stream, which we expect to hold up well and all economic cycles.
Batesville is a non cyclical business with strong cash flow and we have a good parts and service business, which accounts for about a third of our process equipment group revenue, which is fairly stable and very profitable.
In addition, we continue to see strength in the backlog with Baker Purion projects, which we expect to deliver over the next several quarters.
Finally, with our focus on working capital efficiency, the execution of synergies and deploying the hillenbrand operating model, we have multiple levers available to support our progress.
We feel good about our ability to generate cash going forward and meet our deleveraging targets.
Our long term capital deployment strategy is not changing but we are temporarily modifying our approach by curtailing share repurchases and M&A to prioritize improving our leverage ratio.
Once we're comfortably back within our target ratio, we will resume our focus on executing strategic investment and returning cash to shareholders through share repurchase we expect to maintain a strong balance sheet and a liquidity profile that we'll continue to provide flexibility to execute our strategy.
In summary, our solid fourth quarter performance was as we had expected in a capped off a successful year for hillenbrand.
Our focus is now on capitalizing on the momentum we've generated and large plastic projects and driving flawless execution on the milacron integration to deliver the targeted synergies and overall business results.
As a reminder, we expect to generate annualized run rate cost synergies of approximately $50 million within three years following the milacron close.
The majority of anticipated savings will come from reducing public company cost, capturing direct and indirect spend opportunities in realizing operating efficiencies.
Work plans have been developed to deliver run rate synergies of approximately $20 million to $25 million in year. One we're very confident in our ability to deliver on the committed cost synergies.
Furthermore, we believe there is additional opportunity as we leverage the hillenbrand operating model throughout the operation as well as driving revenue synergies across the business by leveraging cross selling opportunities of extruders material handling equipment and utilizing our global footprint to further penetrate the aftermarket.
We will work together after the close to better defined plans to drive results in these areas.
Ill now turn to our outlook for fiscal year 2020.
At this time, we are providing guidance only on our current standalone business as we have not closed on milacron.
We will revisit our outlook for the combined company with next quarter's results with the expectation that we will have completed the milacron transaction by them.
Looking forward, we expect revenue growth in the process equipment group of 2% to 4% at current exchange rate.
We anticipate growth will continue to be driven by the plastics business, particularly the large systems projects that have fueled our significant order backlog.
In contrast, we expect continued pressure across the other industrial businesses.
Batesville revenue is expected to be down 1% to 3%, which is consistent with a forecasted decline in annual burial volume.
On a consolidated basis, we project revenue to grow 1% to 3%.
We are targeting adjusted EBITDA margin expansion of 50 to 70 basis points in the process equipment group. This year, driven by our global procurement initiative and restructuring actions.
We expect some offset from continued mix pressure with more large plastics projects and fewer proppant screening machines than last year.
As I mentioned earlier, we are forecasting batesville EBITDA margins to be in the range of 20% to 21% for the year.
Adjusted earnings per share for 2020 is projected to be to 45 to 216.
That adjusted EPS range reflects earnings growth of 3% at the midpoint.
We recognize there's uncertainty around global trade and the macro economic outlook at the same time. We believe we are well positioned for continued growth and feel confident we can deliver results within the targeted range.
Cash generation remains a top priority and our goal remains to deliver free cash flow greater than our net income.
Adjusted effective tax rate is forecasted to be approximately 27% as a reminder, we'll revisit our outlook for the combined company with the next quarter's results.
Finally, I'll comment briefly on timing.
We expect earnings growth to be more heavily weighted to the back half of the fiscal year, we anticipate some incremental pressure to our first quarter based on the timing of large projects in the backlog and tough comps driven by higher margin separation equipment for Proppants and last year's first quarter that will not repeat.
Also keep in mind Batesvilles revenue is seasonal the fiscal year second quarter is generally the largest driven in part by the severity of the flu season.
In summary, we are confident we can build our positive momentum in fiscal 2019 and continue to drive profitable growth for hillenbrand.
At this time I will turn the call back to Joe.
Thanks Kristina its.
As I mentioned earlier, we had a good finish to the year with solid fourth quarter financial results, including record revenue and adjusted earnings per share.
We're encouraged by the growth in large systems for the production of plastics as well as Batesvilles performance in delivering healthy margins in the face of lower volume and higher input costs.
Our teams remain focused on executing our strategy as we begin the new fiscal year.
With a strong order backlog and a robust project pipeline, we anticipate healthy organic growth in the process equipment group.
We're also working hard to walk of Milacron to hillenbrand.
Together, we will continue to take care of our customers and execute on our strategy and plans to deliver the full potential of the acquisition.
That concludes our prepared remarks, we're ready to take your questions.
As a reminder.
We will not be addressing questions regarding milacron's quarterly performance with that I'll ask the operator to please open the lines.
Thank you.
Ladies and gentlemen, I would look to remind you that in order to ask a question Press Star then the number one on your telephone keypad.
The first question comes from Matt Summerville of D.A. Davidson Your line is open.
Thanks, Good morning couple of questions.
First with respect to the 2% to 4% organic you're forecasting for PDG can you provide maybe parse that out a little bit in terms of what your expectation would be just with respect to the comparing business between large projects engineered plastics in parts and service and then what the expectation.
Good for.
Tax red valve level Terrasource, maybe the general industrial businesses, if you want to refer to them.
Yes, Thanks, Matt I'll start and then Kristina may way and so.
We are expecting higher growth.
When we look at the process equipment group in the larger projects again, driven by co periods.
Business and polyolefin systems, and so we see a good backlog there we see a good pipeline of projects there and expect continued continued growth there.
From an engineering plastics perspective, we see modest growth in engineering plastics as we see we do see some pressure from kind of global demand and a slowdown, but we've also seen some nice projects.
In some some.
Some end markets like PVC polycarbonate.
Cetera, So so thats a.
Modest growth rate and then from parts and service perspective, we expect continued.
Good parts and service growth, we saw good parts and service growth this year, especially on a constant currency basis.
And expect that to continue as we head into fiscal 2020, I'd say for the rest of the industrial businesses. You know, it's it's pretty flattish kind of growth as we look year over year.
We've got a little bit of pressure that that we'll see in the first half around.
Tough comps related to.
Screening equipment used for Proppants.
And then we just in general softness in sort of industrial markets.
Around the world So.
So again, the the strongest growth and peg comes from the large projects, we do see.
Solid demand on the engineering plastics side, as well, particularly given that we've balanced out some of those.
More cyclical down end markets with some some other projects related to certain types of plastics and then.
Flattish growth for the rest of the business.
And then with respect to the comment you made about the project activity the funnel.
The large side of things within that period, maybe a little bit more granularity there the number of projects in the funnel is you headed into fiscal 20 versus maybe what you had on the drawing board heading into fiscal 18, and 19 is there any sort of relative characterization or maybe numerical quantification you can put behind that.
Yes, so we don't really share the numerical quantification, but but as you can imagine these are publicly announced projects. The large projects. There are a handful of these you know.
It's not like along spreadsheet, it's relatively short list of.
Pretty large projects.
And then I would say that the project pipeline is really it's very similar in comparable to what we've seen over the past couple of years.
And again the pipeline tends to be pretty focused around North America, where we continue to see growth related to the the the use of shale gas pretty good for four.
Polyethylene and then in Asia, where where.
Oil based products are the feedstock and thats typically a little bit more probably polypropylene oriented and so we continue to see that same sort of mix of business and those geographies as the key keep places for those large projects.
Thanks, guys I'll get back in Q.
Thanks, Matt.
Your next question comes from Daniel Moore of CJS Securities. Your line is open.
Joe Christiana good morning, Thanks for taking the questions.
Hey, Dan.
Let's start with the Joe you mentioned.
Kind of three key platforms that you'll have pro forma once the deal with milacron closes.
Beyond just organic cash generation and the synergy capture what opportunities do you have.
To potentially de lever the business faster relative to some of those smaller possibly noncore businesses in the portfolio.
Yes, so so Dan I think you're aware weve for the last few years, we've talked about our strategy, which is to is to strengthen our current platforms and then to continue to build platforms. When we see platform. As you know, we mean scaled businesses that have $500 million more revenue and.
And we have scale in the marketplace with size et cetera, but also or scale economically, but also scale in the marketplace, where we're having very good position in the in the industries that we serve and so yes with the Milacron acquisition. We're we're excited because we think it fits sort of both of those strategic intense and one is the coperion business gets drawn.
Longer.
And I think the milacron businesses get stronger as they can cross sell products and share technology, particularly around the extrusion business and material handling.
And then there was I mentioned I think in the prepared remarks, we get we get to new service sizable platforms in the end Dcs business and the HPP business. So as we look forward and we think about capital allocation of course after we've paid down debt, we would expect to allocate more capital where we get the highest.
Returns and we would expect that to be.
In building out some of the larger scaled platforms that we have.
From from some of the smaller businesses perspective, you know we constantly look at our portfolio, we've sort of I think we say this every every time on the call. We're constantly looking at the portfolio. We formally look at twice a year.
Once with the full board.
And so we're always looking at that portfolio as we think about where we're going to allocate capital going forward.
And where we get the best returns.
You know if there is out there is a better owner for one of those businesses, we can create shareholder value with the divesture of one of those businesses I think as we've said in the past right we would be open to that.
And then related to debt of course, if something like that were to happen a transaction would happen. We would we would certainly use the proceeds.
To pay down debt I mean, that's our first priority in the coming.
12 to 24 months.
Very helpful.
Maybe just shifting gears you mentioned.
And.
Process equipment, specifically coperion expect to when your share seems like you've been winning an outsize share over the last year or two maybe just talk about some of the differences you alluded to some of the technologies features.
Do you feel like you're sort of distancing yourself in terms of those this year.
The percentage of opportunities you're winning any commentary there will be helpful.
Yes so.
We're a little hesitant to talk too much about.
Share in this business because it's really a long term business you really have to look over a number of years given the size of the projects and how they are awarded.
But we feel very good about some of the innovations that the co peer in business has undertaken.
And they've really been focus I think around to two places one is to continue to increase throughput.
With our systems with smaller pieces of equipment less energy costs.
And so so thats very beneficial to our customer base and really the demand for larger and larger projects continues in the marketplace and that really plays to our strength.
I think.
Secondly, we're the only provider that can offer really to complete system, where we have both the extrusion system and then all the material handling that goes around that.
And there are certain benefits that we can offer to our customer.
You know around the size of their footprint.
The ability to make all those pieces of equipment work together to optimize their system and we understand the entire system.
So with one person to call when there's an issue and a comprehensive understanding of how to fine tune those systems and make them more efficient and productive for for our customers. So a number of those kinds of things. We think have positioned us really well for this trend of large projects increasingly large projects.
Around the World and then we have a terrific global footprint.
Very strong in Europe , very strong in North America.
Of course significant in Asia, as well and so we feel like we have some real real competitive advantages.
And.
And feel good about our competitive position in the marketplace.
Very helpful last from me ill jump back, but maybe for Kristina, but.
You alluded to the softness that milacron than seeing here in the short term.
With that have any impact on your longer term sort of fiscal 21 targets of getting to somewhere in the ballpark of 325 million in free cash flow.
Yes, so I.
I think our long term thinking has not changed to Dan. So we still expect to get that 325.
Million dollars of free cash flow.
And by 21.
We do close hopefully by the end of the year and in the first quarter, we will be coming out with combined guidance.
At that point will also talk more about.
That $325 million, but right now.
It's still the same long term thinking that hasn't changed.
Yeah. This is a little blip, we knew what we were buying and.
We will.
Execute the synergies and.
We expect to hit that 325.
In the next couple of years.
Very helpful I'll jump out thanks for the color.
Thanks, Dan.
Again, if you would like to ask a question press star is on the number one on your telephone keypad.
Next question comes from John Franzreb of Sidoti and company. Your line is open.
Just a little bit on the margin projections and process.
Given the mix of here outlying then show how do you achieved 50 to 70 basis points and EBITDA margin given the pressure of lower margin polyolefin businesses, I mean projects in the business mix.
Yes so.
Those gains come from a big driver that is weve.
Put together procurement initiative that we kicked off a couple of years ago. So thats, a big driver of margin improvement for us as well as a number of other projects driving operational efficiencies in the business and so those are longer term projects, we have some visibility into those projects and into the backlog and so we feel pretty.
Good about the margin profile that we've outlined in guidance, but again, it's largely.
Some of the cost actions that we've taken efficiency gains and then a big driver. The efficiencies of also is our global procurement organization.
Okay. So it's not really volume dependent.
Well volume is always important piece of.
Our margin profile and we've built our supply chain to be more flexible to build flex up and down with different volumes.
But certainly volume is important but a lot of those.
You know improvement projects, including procurement, they will happen independent of volume and so we do again expect you guys get those gains as we move through the year.
On a percentage basis.
Okay got it and similarly in Batesville projecting an EBITDA margin of 20% to 21% that's down sequentially in.
A.
Seasonally weak quarter.
Can you talk a little bit how much of that is volume how much of that is commodities.
What's the composition, you're assuming that the base for margin erosion.
So John this is Kristina I am when we think about based solid going forward. You know, we probably we are going to have a significant commodity inflation headwinds, but we are going to have non commodity inflation, so typical wages and benefit that.
Combined with lower volume because remember, it's a high fixed cost business.
That's really why how we're getting that 20% to 21% EBITDA margin.
Okay, and I guess, one last question I guess, you mentioned the millicom savings is sticking to the $50 million.
Just the weakness of Milacron does that and I know you said 2020 5 million can you what does that enables you to realize the saving sooner what is pushed further to the right at the three year horizon.
No. So we still see achieving that $50 million within that three year timeframe that annual run rate and when we think about the year, one saving the $20 million to $25 million of run rate savings at the end of year one really.
Remember, there's a lot of public company cost.
And direct and indirect procurement savings that are tied to that $20 million to $25 million. So regardless of the performance of the business.
We still feel very confident that we're going to get that 20 to 25 million run rate savings in year one.
And then.
50 million by year three.
Another thing that I would highlight as.
There are other opportunities that we will be working on post close so Joe alluded to revenue synergies that will be working on and then further operational.
Synergies just deploying our hillenbrand operating model.
Okay, Thanks, Christine I'll get back into queue.
Thanks, John Thanks, Tom.
Your next question comes from Daniel Moore of CJS Securities. Your line is open.
Thank you again, just a little more granularity on the cadence of the guide so Kristina how much Proppants revenue did you recorded in fiscal Q1 of last year and how much revenue.
Ballpark range.
So would you expect in your fiscal 20 guidance overall.
Yes, so proppants and.
Last year first quarter was about $15 million.
As we look at this quarter, we don't have any proppant capital revenue baked into our guide.
For the full year, we had about $20 million of Proppants revenue. So really the province revenue was heavy in first quarter and little lighter in second quarter, and then really that lapse third and fourth quarter and again that's for capital equipment.
And essentially.
Little to none and near the full year 20 guide as well.
We have we have no capital.
For proppant and the 20 guide.
Got it very helpful.
And then some housekeeping stuff you said, 27% tax rate I think I heard.
Capex for next year.
Core hillenbrand, what are we thinking right now.
Roughly 2% of revenue.
2% revenue great.
And.
Lastly, Joe you mentioned, obviously this customary closing conditions things that are out of your control.
If all fall fell.
Everything fell as well as it could shareholder votes on the Twentyth I mean theoretically could close by the end of the month is that correct.
Yes, so the shareholder vote is on the Twentyth as I mentioned in my prepared remarks.
Then the contract calls for if that's all the closing conditions are satisfied on the Twentyth as an example.
That means that that by contracts, we closed within three business days the longest so.
So if everything fell into place perfectly youre looking at a pretty.
Relatively fast timeline, but again I just want to stress that.
There's a number of things that have to fall into place in happen, we don't expect any issues, but but I can't really predict what all those things are going to be and how it's going to play out but thats the kind of timeline that that we'd expect up the shortest and then I think.
Christine mentioned, probably at the longest is some towards us somewhere towards the end to the quarter. So we expected to happen during this this quarter.
Very good thanks, Thanks again.
Thanks, Dan.
Your next question comes from Matt Summerville of D.A. Davidson Your line is open.
Just a follow up I want to talk about the plastics business for a moment is there are ways to sort of frame up how much of your business assorting potentially exposed areas or milacron's for that matter potentially exposed to areas, where you sort of have this quote war on plastics and then convert.
Firstly I want to flip it around and really trying to dig into a little bit deeper how your business could be leveraged to the recycling side of things and proposed European regulations around how much post consumer content has to be included in products sort of going forward. So.
To be work in some regulatory commentary as well thank you.
Yeah sure so.
Our comments we.
No what what Coperion does is a large part of their business is in base resin plastics, So think mostly polyethylene and polypropylene and so we don't really know we're all of that goes and so we're kind of using general sort of general industry metrics.
Or data for that and so you know I would say.
We're in probably about the 10% range or so again, there's a lot of assumptions there that would be attributed to single use plastics. I think then we of course track, where and what kinds of plastics or subject to some sort of regulatory.
Ban or or regulatory issue, that's a much smaller part again, our estimates are less than 5%, 5% or less that that would be subject to some sort of regulatory band around the world. So.
So thats kind of how we think about.
And thats in that's in the process equipment group, so that process equipment group kind of metrics. So.
So and I think milacron is you think about the milacron business again, we don't own the business, yet and have a lot to learn but but they're not really sort of a bottle and bags kind of company, they're really a more durable plastics company, where they're focused in areas like consumer goods. So think.
Furniture coffee ports.
Automotive.
Medical.
Construction so.
Profiles and frames and so they're really not.
So a big player in single use plastic so so I don't know exactly what that looks like but that again is probably somewhere similar to us in that you know.
10%, maybe a little bit more range for a single use plastic in probably pretty similar in terms of where their actual legislative road policy bands or.
Something in place.
So.
So I hope that that helps answer your question now.
Okay, and then recycling, yes, which so you know we've been.
Very focused at the in the Coperion business on recycling.
We do have good relationships with some of the larger systems providers for recycling industry.
And as we look forward, we anticipate growth we've had growth and we anticipate continued growth in recycling the as a matter of fact, we think that that parts of the milk on product line may help us.
In our offering.
But as recycling continues to gain to catch hold as volumes of recycling increase we think that plays to our favor as were our strength is in.
Sort of larger products and systems and so.
Recycled product is similar to a version product in the sense that it goes through and extruder. It comes out it gets pelletized it gets moved dramatically.
And so youre equipment is using recycling and again, we're working to grow that part of our business actively and had been for the last the last few years.
Thanks, Joe.
Thanks, Matt.
Your next question comes from John Franzreb Sidoti and company. Your line is open.
Yes.
You had some pricing that you realize in both businesses in the fourth quarter. Just wondering what your assumptions are your outlook isn't in pricing in this fiscal 20 guidance.
So as as we think about Batesville.
You know prices, usually offset with mix, so essentially saying flat, that's how we get down to our.
Our 1% to 3% decline and.
Revenue for Batesville, when when we think about process equipment business.
You know, we've been doing pretty well in some of our process equipment group, specifically around strategic pricing and when we think about that.
Roughly 1% to 2%.
For our pag, specifically now kind of going into a recession environment, where the industrial businesses. We don't see that so thats, primarily at the Purion business, where we're seeing thus.
Large.
The the large.
Project the volume.
Great. Thanks, Kristina and in regards to the other industrial business.
And on plastics pumps thousand screen.
Joe which businesses, you're most concerned about in the outlook in the year head.
I think we have a crushing business terrasource, they're facing some some industry headwinds they.
Continue to provide parts and to capital equipment in the pulp and paper industry.
Anyone that follows that they're at like a 10 year low for pulp and paper prices and so we've seen a slowdown in capital equipment purchases as well spare parts in that segment of the business, which is a relatively significant segment of the business.
And then also were historically in.
In crushing for coal power companies, that's mostly spare parts.
But we continue to see pressure on that as natural gas continues to displace call across the country. So thats a business that really.
I had some secular challenges it a little bit a cyclical cyclical challenge now the flip side is your other markets may.
May improve during the year, we play in the fertilizer market in that business. We may see some rebound there is some other end markets, but thats, probably the business that has the toughest industry headwinds right now in our in our portfolio.
Okay, great. Thank you very much.
Thanks, Don.
There are no further questions at this time I will now return the call to our presenters.
Thank you operator, and thank you everyone for joining our call I will tell you as a management team, we're very focused on running our businesses.
Very focused on preparing for the close of milacron and the integration achieving the the synergies in the short run and and the long run as well and then really very focused on making sure that the integration. We're prepared for day one it goes smoothly and we have the teams well set.
To realize the full potential and the long term value. The deal we remain extremely excited about the deal.
And and look forward to talking more about that in our next call.
Next quarter. So thanks again for joining us today, and we look forward to speaking with everyone again in February as we talk about our first quarter results.
And the Milacron acquisition have a good day.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.