Q1 2020 Earnings Call
Okay. Thanks for the first quarter fiscal 2020.
A replay of todays call will be available.
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They March six 2020.
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At this time it is my pleasure to turn the conference calls over to which Dudley Director Investor Relations Mr. that Lee. Please go ahead.
Thank you operator, good morning, everyone and welcome to Hillenbrand's first quarter fiscal 2020 conference call.
I'm joined by our President and CEO Joe.
Labour along with our senior Vice President and CFO Kristina familiar.
During today's call will discuss first quarter financial result, and the outlook for our businesses, including updated guidance to incorporate our recent acquisition of milacron.
Well then open the call up for Q and <unk>.
Before we get to the results, let me remind you that arc.
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 will be discussing certain non-GAAP operating performance measures.
Encourage you to take a look at the slide.
Presentation in our 10-Q, which we found on our website or deeper discussion of forward looking statements and the risk factors that could impact our actual results.
Now I'd like to turn the call over to Jeff.
Thanks, Rich good morning, everyone.
Before we start I just wanted to let you know that are prepared remarks will be a little longer than normal.
We have a lot to cover in the call, including Milacron results in the first quarter, We'll give me an integration update and then updating annual guidance that includes milacron.
So with that said I'll get started.
Our vision and hillenbrand is to build a world class global diversified industrial company.
With a proven record of success driven by the Hillenbrand operating model.
Our mission is to create value for our customers and great professional opportunities for our employees.
To improve the communities in which we operate and importantly to provide superior returns to our shareholders.
We took a big step.
<unk> in the further ends of both our vision and mission in the quarter.
On November 21st we closed the acquisition of Milacron.
Global leader in highly engineered and customize systems, the classics technology and processing with about $1 billion an annual revenue.
It's the largest acquisition in our company's history.
<unk> and represents a pivotal step in our journey to become a world class Global diversified industrial company.
So with as a backdrop, let me share a little bit about the integration.
As we discussed last quarter, we developed a comprehensive integration plan that we are ready to implement immediately upon closing.
And our teams hit the ground running on day one.
I personally visited over a dozen locations in the U.S., Canada, Germany, the Netherlands, India and China.
And met with several thousand legacy milacron employees in town halls, and smaller meetings around the globe.
I was.
Overwhelmed by the warm reception I received for Milacron employees and the very positive reaction they had to the deal.
Our integration management office did a great job developing the integration plan that we are executing now.
We're on track and expect to achieve our targeted synergies.
Quickly executed a number of initiatives associated with reducing redundant public company costs.
We're on track with our functional integration work streams.
We're currently advancing their procurement work stream initially focused on achieving quick wins.
And building the platform to achieve long term savings.
All of our.
Recent activities are underpinned by the Hillenbrand operating model.
Which we believe we'll continue to drive long term value well after the integration is complete.
We're just getting started as a combined company, but I'm highly confident in our deal thesis and the value we can create by bringing milacron together with hillenbrand.
The macro environment, it's difficult right now.
We're taking action to deal with the many challenges we face, but as I look forward beyond the short term external issues I'm excited about our future.
First we have complementary product lines with excellent positions across the plastics value chain.
This provides the opportunity to leverage and combine our share technologies and capabilities to create innovative solutions that will have a positive impact for our customers around the world and provide new profitable growth opportunities for hillenbrand in areas, such as biodegradable plastics and recycling.
Second we have an.
Standing global footprint, which we expect to leverage to accelerate geographic and aftermarket growth.
Third we believe our combined scale and purchasing power will generate procurement savings across the entire enterprise.
Fourth our complementary process capabilities will enable us.
To implement best practices across key functional areas to improve both our efficiency and effectiveness and finally, the hillenbrand operating model provides a clear methodology and set of tools to improve our businesses.
Implementing the model Milacron will help us achieve our strategic goals and build a strong.
Condition for the future.
Despite the short term challenges in some of our end markets. We expect demand for plastics to continue to grow over the long run driven largely by growth in the emerging middle class.
Additionally, we believe the benefits of lightweight durable plastics will support continued growth in.
Applications like automotive Lightweighting in consumer goods in construction were plastics improved durability require less maintenance and then medical products, where there is an increased focus on safety improved drug and therapy delivery and durability.
In summary.
We remain.
Confident in the strategic logic of the acquisition and remain excited about the long term possibilities for the combined company.
Now, let me briefly discuss the legacy milacron businesses and Milacron's performance since the acquisition.
Probably the closing of the acquisition.
Milacron.
Disclosure consisted of three reportable operating segments.
First is melt delivery and control systems or MDC, yes.
Designs and manufactures highly engineered technically advanced hot runner in process control systems mold basis and components.
Hot runner.
In process control systems serve a global market with a strong presence in Asia, Europe and North America.
We have a variety of end markets, including automotive consumer goods electronics medical and packaging.
Demand for this equipment is driven to a high degree by product lifecycle.
Cycles.
Meaning that each time, there's a new product introduction or refresh it requires a new hot runner systems that is uniquely configured to the new mold.
Second is advanced classics processing technologies or a PPG.
Designs and manufactures plastics.
Processing equipment and systems.
Including milacron branded injection molding and extrusion systems.
Milacron as a leader in injection molding and extrusion systems in North America, and has a leading position in injection molding in India.
From an end market perspective, these product lines have strong.
Since in construction automotive consumer goods and medical products.
Additionally, they serve custom molders that operate across a variety of end markets.
And finally.
Fluid technologies.
Under the same cool brand offers metalworking fluids used in a variety of in.
Mysteries to help customers reduce their production costs.
The integration of milk has just begun we're currently evaluating how to deal how the deal will affect our reportable operating segments.
At this work is not yet complete.
As a result.
We'll be talking about the milacron business as a whole.
This call.
Looking at the current performance of the legacy Milacron business. It's clear we are facing headwinds we've continued pressure from the global economic slowdown, including a week worldwide automotive market in general weakness in China.
All of which are affecting capital investment.
Following industry downturns like the one we're currently facing the legacy milacron business and more specifically, it's hot runner product lines have experienced an accelerated recovery before returning to their long term average growth rates, showing resiliency and an ability to capture pent up demand.
We believe there's an opportunity from material improvement in momentum in the second half of the calendar year, but it's difficult to predict the timing.
Also when we closed on Milacron, we announced that we were reviewing strategic alternatives for the simple business.
Given our vision to create a portfolio.
Scalable platforms, and our desire to pay down debt.
We believe it's in the best interest of both Hillenbrand Ensign cool to seek strategic alternatives for the business.
Jim Cool is a different kind of business compared to the other parts of milacron hillenbrand.
And we believe it will be better able to.
Weve its goals under different ownership.
It's a compelling business with attractive financial characteristics and we believe there a number of highly interested incredible potential buyers or partners.
We're working with Houlihan lokey to assist in the strategic review.
As we've said previously you can assume if we were to.
Divested any part of our portfolio, we would apply the proceeds to debt reduction.
Now, let me turn my comments to the legacy Hillenbrand segments, starting with the process equipment group.
The process equipment group performed well in the quarter with revenue growth driven by large extrusion material handling.
And.
In addition to a modest increase in aftermarket parts and service.
We've seen a continuation of recent trends with strong demand for polyolefin systems in the us China and other Asian countries.
We have a strong backlog and we continue to see a solid pipeline of projects that we.
Anticipate will be awarded in the coming quarters.
From an engineered plastics perspective, the business has generally been soft.
And we remain cautious amid continued macroeconomic weakness.
Keep in mind, we tend to see shorter investment cycles in engineered plastics as customers react more quickly to.
In demand compared to the longer cycles, we see in the polyolefin industries.
The near term we.
Weakness in new equipment sales the global automotive market is expected to be offset by demand several other product categories, such as PVC polycarbonate.
Over the longer term.
With a very positive outlook for engineered plastics.
As we expect that they are advancing technical capabilities will lead to greater adoption in a variety of applications and end markets.
Another area, where we've been very focus is recycling.
A number of our products are core to the recycling process for.
Both post industrial and post consumer applications.
Sustainability and efforts to create a circular economy are getting more and more attention and deservedly. So.
Estimated at less than 5% of all plastics are currently being recycled.
And that needs to change.
It's likely that government.
Nations around recycling.
And consumer demand for the use of recycled content will continue to increase.
Grown in recycling applications and believe that we're well positioned to become a leader in the space.
As volumes increase.
Our strength in high capacity equipment and systems can be a real.
Advantage.
While relatively small the pipeline of recycling projects is growing quickly and we anticipate continued long term growth in this part of our business.
Let me comment briefly on our smaller process equipment group businesses, which have felt more pronounced effects of the global industrial.
Slowdown with weak demand across a number of end markets.
As expected the separation business was down in the quarter, largely driven by lower capital equipment sales for Proppants production.
Demand for profits equipment remains low and.
We don't anticipate that to change in the near term due.
To low oil prices.
And industry overcapacity.
Broadly speaking other end market served by the separation business have been relatively flat slightly down compared to the prior year.
Similarly, and flow control, we faced sluggish demand overall for industrial applications. However.
We have seen some positive momentum in other areas of mining and specialty pumps and activity in the municipal market appears to have picked up recently as well.
In summary for the process equipment group.
We expect continued strength in large polyolefin projects continued growth in aftermarket parts and service.
<unk> decreased demand for capital equipment used in profits production.
And essentially flat performance for the balance of the business.
Turning to Batesville, our strategy for this business is it generates strong cash flow to fuel our investments for growth on the industrial side of the business.
Bases in.
Industry leader backed by product quality service and innovation that we believe is second to none.
Revenue was in line with our expectations and declined slightly in the quarter.
Keep in mind that burial demand faces a secular decline driven by the increased rate.
Which families.
Up for cremation.
April's margin performance met our expectations for the quarter, and we expect batesville to achieve our full year guidance.
Flu activity in the us in Canada has been relatively high however, flu severity and the associated mortality.
I've been low so we've not seen a big impact on burial demand.
So in summary.
As I reflect on our performance for the quarter.
I would say that first the integration of Milacron is on track and we expect to realize accelerated synergies in year one.
Second that.
While the newly acquired Milacron businesses are facing more difficult than expected end market dynamics in our financial performance reflects this reality, we remain excited about and focused on delivering the long term benefits to the acquisition.
Third the Batesville business is performing well and inline with expectations.
The fourth the process equipment group is exceeding expectations again, driven by strong performance and large polyolefin systems and prudent cost controls.
Finally.
Before I turn the call over to Christina Let me briefly touch on the Corona virus.
We are monitoring the situation.
Situation in China and around the world very closely to ensure the safety of our employees and to minimize any impact on our customers or operations.
We've taken actions to limit travel and we're monitoring our global supply chain and taking precautionary actions to mitigate the risk of significant disruptions.
Many operations in China remained closed due to the extended lunar new year holiday.
Remains a very fluid situation and we'll continue to watch it closely.
At a high level approximately 10% of our revenue comes from China.
We are providing a wider range for guidance to reflect.
Guesstimated risk to our financial results.
I'll now turn the call over to Christina Christina.
Thanks, Joe and good morning, everyone.
We are reporting performance for a combined company following the acquisition of Milacron, which closed on November 21st.
Our first quarter fiscal year 2000.
Any included 41 days of Milacron result.
We've established a new reporting segment that includes all three of the legacy Milacron business segment.
I'll begin with our consolidated results.
We reported total revenue of $567 million for the quarter an increase.
38% over the prior year.
Organically revenue grew 5% driven by the process equipment group.
Adjusted EBITDA of $92 million increased 43%, primarily due to the milacron acquisition and adjusted EBITDA margin of 16.2.
<unk> percent expanded 60 basis points compared to a year ago.
Organically adjusted EBITDA increased 1% and adjusted EBITDA margin decreased 60 basis points.
We reported a GAAP net loss of $3 million are.
Five cents per share.
That was a decrease of 50 cents per share compared to last year.
Merely as result of business acquisition and integration costs.
During the quarter, we incurred a total of approximately $54 million. These onetime costs in connection with a milacron.
Sure.
Adjusted net income of $43 million resulted in adjusted earnings per share of 63 cents.
An increase of 14 cents per 29% year over year.
Milacron contributed 10 cents to adjusted earnings per.
Per share.
Organically adjusted earnings per share increased 4% or 8%.
The adjusted effective tax rate for the quarter was 22.6% down 650 basis points from prior year, primarily due to its a discrete tax benefit.
Related to foreign statutory tax rate reduction.
This tax benefit largely affected the legacy milacron businesses.
Excluding the acquisition, we estimate the adjusted effective tax rate to be approximately 27.7%.
We generated operating.
Cash flow of $18 million in the quarter and that was 50 per cent lower than last year's first quarter, primarily due to acquisition and integration costs.
Partially offset by reduce working capital requirements.
Capital expenditures were approximately $6 million in the quarter.
Also returned $16 million to our shareholders in the form of cash dividend.
After closing on Milacron, we've finished the quarter with a net debt of $1.7 billion.
Let me touch on our capital allocation strategy, where our number one priority is to pay down debt and reduce leverage.
Given our current net debt to even <unk> leverage is 3.8 times were fully committed to using our excess cash generation beyond paying dividends to paying down debt over the next several quarters.
We're curtailing I'm, an activity and share repurchases as we focus on returning to our targeted leverage range.
Once were comfortably back within our targeted leverage ratio, we expect to resume our focus on executing strategic investments and recurrent returning caster shareholders through Sherry purchases.
We expect to maintain a strong balance sheet and illiquidity profile that will continue to provide flexibility to execute are profitable growth strategy.
Turning to the next slide let me cover segment performance, beginning with a process equipment group.
The process equipment group revenue of $370 million grew nine per cent compared to the prior year.
Excluding the impact the foreign currency exchange revenue increase to 10 per cent.
Revenue growth was primarily driven by continued demand for large extrusion and material handling systems for the production of plastic.
That growth was offset by weaker capital equipment sales across other industrial end markets, where we continue to experience lower demand as we expected.
In particular province capital equipment sales decreased $14 million, you're every year.
The overall process equipment group aftermarket business grew two per cent in the quarter for 3% excluding foreign currency exchange.
Adjusted EBITDA margin of 16.8% increased 40 basis points.
Adjusted gross margin was down 270 basis points, primarily driven by business mixing inflation, partially offset by pricing and productivity improvements.
As expected we had some margin pressure from a higher proportion of lower margin large polyolefins systems projects.
And the lower proportion of separation equipment for province, which have strong margin.
Keep in mind that the growing installed base of the large systems increases the opportunity for higher margin aftermarket revenue in the future.
Growing the aftermarket business and increasing our base of high margin recurring revenue is a key element of our strategy.
Operating expenses as a percentage of revenue decreased 340 basis points to 18.3% as a result of focused effort on discretionary cost controls and restructuring benefits.
The process of equipment group order backlog of $901 million at the end of the quarter decreased 5% compared to the prior year or 3%, excluding the negative foreign currency impact.
On the other hand backlog increase sequentially, 4% compared to the fourth quarter driven by strong sequential orders for polyolefin projects.
Also there continues to be a healthy pipeline polyolefin projects expected to be awarded in the coming quarters.
It's worth noting that we have sequential backlog growth in each of the process equipment group businesses not just the large co parion projects.
Moving to the Batesville business they'd still revenue of $127 million decreased 1% compared to the prior year.
Batesvilles unit volume increased despite lower estimated demand for burial casket.
However, average selling price decreased as a result of the continue trend of long term mixed decline in the industry.
Adjusted even a margin of 18.1% was 270 basis points lower than the prior year.
This margin performance was as expected in the quarter of the business work through some higher cost inventory in incurred higher health care costs. In addition to the typical mixed pressure that business faces.
We expect profitability will improve next quarter.
We now have steel contracts in effect at lower cost and we anticipate healthcare costs will return to him more normal level.
Additionally, we're forecasting incremental productivity gains for the balance of the year that will contribute to stronger margins.
We continue to forecast Batesville, adjusted even a margin to be in the range of 20% to 21% in fiscal year 2020.
Batesville continually leveraging the hellenbrand operating model to manage the business and a declining demand environment.
The leadership teamwork relentlessly to improve efficiency reduce costs and operate a lien inflexible organization.
Now, let me comment on Milacron's results for the period in which we own the business beginning on November 21st.
All share our thoughts on the outlook for the business when I discussed guidance.
Although we're not providing specific period comparisons for milacron directional a financial results were below the prior year across the business, reflecting slow down in the global economy.
In particular weakness in China in the global automotive and market were especially challenging for milacron.
For the quarter. The Milacron's segment revenue was $133 million with adjusted gross profit of 38.8 million or 29.1% of segment revenue.
During these 41 days this revenue generated 19.8% adjusted Eva dumb margins driven mainly by the timing of shipments as the third month of every quarter is typically milacron's best performing month.
Additionally, the results of Milacron no longer include its corporate costs.
As we have combine the two corporate functions into one and our well on our way to achieving our synergy targets.
On a full quarter basis, the weakness in the global economy continued and the revenue was comparable to Milacron's last publicly reported quarter.
Higher to the transaction closing.
Customer orders decreased approximately 8% compared to the prior year. However, they increase seven per cent sequentially over the prior quarter, driven by North American injection molding capital equipment.
Milacron's order backlog of $147 million decreased approximately 26% from the prior year due to low lower order intake in our injection molding business in all regions, which historically represents between 70% to 80% of the total backlog.
Despite the decrease your every year, we see a solid pipeline of customer projects for all legacy Milacron product line.
Additionally, the majority of Milacron revenue is based on orders that what can ship within a quarter and they never show up in our backlog.
In the past Milacron described a portion of its revenue as consumable.
Which included the entire legacy M.D.C.S. and fluid technologies segments as well as the aftermarket portion of the legacy A.P.P.T. segments.
Going forward, we're aligning milacron to our view of aftermarket revenue to include parts and service retrofits and rebuild on existing capital equipment.
Based on this view aftermarket revenue typically comprises about a quarter of the total revenue from milacron and was essentially flat year over year.
Also during this period, we were able to complete the sale of the former milacron injection molding location and multi reading in Germany proceeds of $13 million were received in December of 2019, and we're used to pay down debt prior to the end of the quarter.
The prolonged a weakness basing some key and markets led to disappointing results in the first quarter. However, as Joe said, we are very confident in the long term resiliency of the milacron business and in our ability to significantly improved that business.
It is this confidence not the short term issues that underlies our belief that this transformative acquisition will drive shareholder value.
Let me turn to the integration process, which is going well.
We executed several actions that position us to achieve your one class energies.
In the quarter, we achieved $3 million of synergies specifically from the reduction of duplicate public company costs.
In addition to these savings we expect to generate savings and indirect procurement this year.
We are well on our way to meeting or exceeding our year one commitment.
Well still early I'm pleased with our overall integration progress to date and we'll keep you updated throughout the year as we continue to make progress towards our objective.
In summary, the legacy Hellenbrand businesses started the you're better than we had expected with strengthen polyolefins systems, partially offset by softness across other industrial markets.
While the milacron businesses have faced more headwinds than we originally anticipated.
Our focus now is capitalizing on the momentum we've generated enlarge plastics projects driving flawless execution on the milacron integration to deliver the targeted synergies an overall business result in generating strong cash flow to pay down debt.
Let me know turned to her updated guidance for fiscal year 2020, including our expectations for milacron.
The forecast for Milacron is based on our approximately 10 month ownership period within the fiscal year.
We will provide additional color on how this relates to annualized your every year performance.
I'll start with a legacy hillenbrand businesses.
Given the stronger than expected performance and Q1 and continued strength in our large systems projects. We expect an additional one per cent volume growth for the full year.
US setting this additional volume we are experiencing a higher affects headwind impact tour reported revenue.
Therefore, our overall expectation for revenue growth in the process equipment group.
Means at 2% to 4% with growth driven by large systems projects.
Actually offset by continued pressure across the other industrial businesses and foreign currency.
Based on the higher volume and progress made on our productivity initiatives, including synergies we are targeting full year adjusted Eva dumb origin of approximately 18.2% representing 70 basis points of year over year expansion.
This is at the high end of our original guidance of 50 to 70 basis points.
Our expectations for bait still remain unchanged with revenue expected to be down 1% to 3% consistent with a forecast a decline and annual burial volume.
We anticipate sequential margin improvement in the second quarter and maintain a full year forecast for adjusted EBITDA margin of 20% to 21%.
Moving to the Milacron business, we continue to see a challenging macro environment.
We anticipate the milacron acquisition to add 850 million to $880 million of revenue women adjusted Eva Dumb origin in the range of 17.8% to 18.3% in the 10 months of ownership.
On a pro forma annualized fiscal year basis.
Revenue is expected to be down approximately 6% to 9%. Your every year due to continued softness in industrial and markets, including weakness in automotive and China with no meaningful recovery anticipated in our fiscal year.
As economic conditions improve we expect a strong recovery in these businesses, it's difficult to predict the timing and severity of these cycles in the short term, but these are good businesses with leading brands and technologies, serving and markets with attractive longterm growth prospects.
We have a strong management team with experience managing through various economic cycles, and see significant opportunity to improve profitability through the implementation of the hillenbrand operating model across the milacron business.
For our fiscal year, we expect adjusted cash earnings per share to be in the range of 348 to 375, representing year every year growth of approximately 12% to 21%, including 45 to 51 sense of cash earnings accretion from the acquisition of mill.
<unk>.
Updating our projection for adjusted earnings per share for fiscal 2022, a range of $2.30 $2.55 compared to $2.45 to $2.60 previously.
This reduction and adjusted earnings per share is primarily due to the impact of noncash depreciation and amortization charges in deal related interest expense.
Additionally, we feel it's prudent to lower end widen the range more than we typically would as we integrate milacron and consider ongoing uncertainty around the macro economic outlook global trade, the U.S. elections, and the Corona virus.
We will be monitoring these factors closely.
Our projections are based on assumptions that includes stabilization of industrial and markets that have recently spaced downward trends, but with limited economic recovery in the second half of the fiscal year.
We have a good line of sight for large <unk> plastics project scheduled later in the year.
However, we have less visibility into other industrial businesses with bastard, turning capital sales, including Milacron.
We expect fates, those second quarter to follow it seasonal trend as its strongest quarter as a result of the flu.
Although it's not our practice to give quarterly guidance I do want to point out that our fiscal second quarter adjusted earnings per share is expected to be significantly lower than our first quarter due to a full quarter of milacron corporate expenses, including incremental interest expense from the acquisition.
In addition continued market softness and the impact of the Corona virus will also contribute to the sequential decline.
Estimate the range for the second quarter adjusted earnings per share to be approximately 40 to 50 cents.
Cash generation remains a top priority and our goal remains to deliver free cash flow greater than our net income with cap acts of approximately 3% of total revenue an acquisition and integration related costs, approximately $80 million to $85 million for the fiscal year.
We still anticipate meeting or leverage commitments of 2.75 net debt to even die by 12 months post close.
Are adjusted effective tax rate is forecasted to be approximately 27% to 28%.
Let me conclude with the integration process as a reminder, we committed to $50 million of run rate cost energies within three years and $20 million to $25 million of Runrate class energies by 12 months post close.
Given the early success and executing or synergy plans, we now expect to realize the majority of the 20 to 25 million dollar target within fiscal 2020.
The primary drivers of our your ones savings other reduction of the public company costs through the integration of a corporate centers as well as indirect spend opportunities across the businesses.
As we deploy the Hellenbrand operating model to Institute best practices around the company globally, we are confident and our ability to exceed the longer term costs energy targets as well.
We're also excited about the opportunity to drive revenue synergies, including cross telling of extrusion and material handling equipment and leveraging our global service footprint to further penetrate the aftermarket which are not included in our current targets.
As you May recall, we significantly improve the margin profile of the <unk> business, expanding Eva down margin from high single digits to mid teens through the implementation of numerous strategic initiatives, including the establishment of a dedicated parts and service Division.
We grew the business by more than 40% and improve working capital turn.
We have only owned the milacron business for 10 weeks, we see clear opportunity to drive operational efficiency isn't the factories improve working capital management across all the businesses and leverage our innovation tool tip.
I'm pleased with our overall integration progress to date and excited about the opportunities ahead.
At this time I will turn the call back to Joe for his concluding remarks.
Thanks Christina.
Over the line for questions I, just wanted to make a couple of comments about our focus going forward.
First I want to reiterate my excitement about having completed the milacron acquisition and having them join the hillenbrand family.
Well this rubio challenging one for milacron, our enthusiasm for the future is high over the come inquiries in years, our company will be focused on three main strategic objectives.
Versus the integrate milacron with excellence and achieve the full strategic and financial benefits of the deal.
Second is to run our core businesses well using the hillenbrand operating model to drive improve top and bottom line performance both the short in the long term.
And third is to generate cash goals operationally and through the execution of the strategic alternative for some cool to pay down debt.
That concludes our prepared remarks ready to take your questions with at O.S.U. operator to please open the line.
[noise] at this time, if you would like to ask a question. Please press start then the number one on your telephone keypad.
Again to ask a question. Please pass star than the number one we will pass or just a moment.
Mm.
And you have a questions on the line ups met Somerville.
Thanks wanting to come questions.
Versatile with respect to Milacron can you talk about what you saw sequentially in the backlog there in specifically to the hot runner business, how much below prior peak levels is that business operating that right now and how do you feel.
<unk> competing from a market share standpoint.
So I met this is Joe Thanks to the question, let let me start on the Mole Masters side, we've seen relatively flat orders in the old Masters side, the business quarter over order and in the hot runner in the Hot run, which is a hot run a business.
And the hot run a business doesn't have a huge a huge portion of his revenues and backlog. It's a pretty quick turn business, but again revenue are I'm, sorry orders and <unk> backlog had been relatively flat over the last a couple of quarters.
And on the injection molding side, we have seen over the last few quarter's a decline in both orders.
And backlog, although we didn't see a <unk> a sequential check up nice take up on the injection molding side of the business and first quarter of our fiscal year.
And then I was also a annoyance.
Yeah.
When I was also curious just at the hot runner peace, how far off prior peak levels is that.
Operating currently.
And maybe talk about phone all of opportunity you see there and what you perceived to be sort of the market share trend in that in the hot runner business specifically.
Yeah. So in the Hot wrote the hot run a business.
Has been down.
A couple of quarters in a row, so probably about 10% from peak periods in terms of orders and revenues. The pipeline remains sort of new did give in the macro environment, particularly in China and as you know this business also serves.
Serves the automotive business and so we're not seeing a significant recovery in this business. There are some larger projects around electronics in Telectronics that we see that are out there, but again, it's unclear when those projects will be released so we're seeing pretty true.
<unk> demand and the order pipeline as well as in orders and so.
As we as you heard in our guidance you know, we're not expecting a significant recovery in that business for the balance of our fiscal year. If there is a recover it'll probably happen sort of towards the end of our fiscal year. It would be our expectation, but again the the hot run a business, it's a pretty fast turn business and so when.
And when businesses open up and they start to a release their new products and refresh products. It can turn pretty quickly.
And then with respect to the outlets you gave for Q2, Christina 40 to 50 cents adjusted U.P.S. told company, what would be it'd be organic earnings outlook for fiscal Q2 relative to the prior year or asked differently, what does the magnitude of milacron delusion that.
In there.
Yeah. So when we think about organically, we would be down slightly on the organic side, primarily because.
Number one.
You know, we we still don't understand what the impact of the Corona virus will have on our second quarter and so one of the one of the reasons for the larger range and the second quarter is because of this slight unknowns.
Obviously, depending on the duration of the the virus and what will happen, we will either be able to make that up back in the back half of the year or again, depending on the duration it might carry over a little bit through the end of the year. So.
Because of the uncertainty of a really what's going on you know, it's we will be down on our legacy business.
I think what I would tell you the the bigger portion of us being down and the second quarter is because.
When you think about milacron.
No <unk>.
This study period as I mentioned in my prepared remarks.
You know, we shipped or a lot of.
Projects equipment in the last month of the quarter and so what happened was we still had a lot of corporate costs that were in the quarter that didn't get allocated to the stub period. So when you think about the biggest change to the second quarter.
Really the corporate cost of milacron, and getting that quarterly impact of those those corporate color.
So that's really you've got a lot of things going on on the second quarter, but that that's really the reason for the wide range.
Thank you guys I'll get back.
Yeah, Hey, Hey, Matt I'll also I I <unk>. They denied a answer your question about share and so just as we do and our process equipment group businesses in the Bay. So business. You know, we we we worked to poke out there and check the market in various ways to understand what our share position is.
And it's not always you know perfectly aligned in the short run, but we generally have a pretty good sense of whether we have a share issue or not but share issue I would tell you while we're learning the milacron businesses, but but the management team is you know really focused on sort of understanding what's happening in the market. We're also working to confirm that externally with others.
Sources of data and I would say, there's nothing that indicates that there's a share issue right now with the businesses.
Oh really facing some very difficult and markets right now again and they they relate to some of the things that we've talked about but we believe it's it's it's an end market issue that is you know the large driver of the or the performance of the legacy milacron businesses.
Sorry, I didn't is not really yeah.
Mm.
And once again to ask a question. Please press start then the number one on your telephone keypad you have a question from the line up Daniel more.
Joker cynical morning, Thanks tricked me questions.
Yeah morning, Dan.
What to start with the full your guide and 80, Christine I think you alluded to this but what's the current levels amortization expense that you're assuming in the fiscal 20 adjusted U.P.S. guide relative to what you might have thought initially when you put out the guidance of.
The crown being a creative just trust fund kinda.
He's out the delta there as possible.
Yeah. So we have in our annual guide for amortization about $64 million.
Of amortization and again that is on our 10 month period. So that's our fiscal year says we you know go into next year, that's gonna be slightly higher to account for the the.
The 12 months.
As it relates to kind of the initial assumption on accretion there are two parts. Obviously the first part is the performance of legacy Milacron's. So that it's a little it's.
Lower than we had expected when we came out back in July with the the announcement the other part as it relates to amortization as we had.
Obviously when you go through an acquisition you have to value your intangible the accountants came and we did our first assessment and we were off on our original estimation by roughly $20 million now what I would say is that is not a final null.
<unk>. So we have about 12 months to really from up that number we will do that over the next obviously to try and get that cleaned up within the next couple of quarters, but there was a flight and that's there as well.
Okay, but based on kind of rough back to the envelope.
Well, we have 20 cents delta so it seems like apples to apples.
It would still be creative maybe by five to 15 cents rather than the double digits, but still up your for your versus the basic function.
Yeah that is that it's correct. Okay. That's helpful.
Then you're milacron as you describe the guide for this year kind of mid to high single digit declines.
You give some pretty good color Joe but.
Can you maybe sort of walk through the <unk> the assumptions of each of the three businesses the hot runners injection molding and and the the fluids business if not to the percentage point just directional <unk>, what's embedded in the in the in the guide for each.
Yeah. So again I don't think we're we want to share a ton of detail given the reporting segment, but but generally so again you know when we announced the deal last summer right. We expected some stabilization in a in the end markets. Obviously those continue to do.
<unk> during 19, which we've seen and then we expect you know some continued decline but stabilization in 20 and so if you think about that on a year over year basis from sort of our fiscal 19 to fiscal 20, it's really the the hot runner system.
And mold part of the business, but really the hot runner systems. You know, it's it's relatively flat at the top line and so you don't have a tough sort of 19 compared to 18, but relatively flat as our expectation and then given the order patterns and the backlog that are happening in injection molding extrusion.
That businesses down a bit more in 20 compared to 19. So that's you know generally how I'd think about the business and then of course, we have the fluids business in there as well, which is you know slightly down in the in fiscal twenties. The expectation yeah, yeah. Okay. Other commas Christina no I I would just agree with.
Joe that when we think about the you know 6% to 9% on a full year fiscal you know calendar for us.
That's primarily driven by the injection molding capital equipment and so when we think about actually in the injection molding business is fair part that you know that was a good news because that's essentially flat ear every year, but it's really what's driving that.
Six to nine per cent down kind of guide is primarily the capital equipment in the injection molding.
<unk> perfect Okay.
Then synergies given the fact that you're running slightly at least ahead, a pace I know, you're you're not ready to revise that number but if there are if there is upside to the 50 million over the next two to three years where would it be.
So I think we would probably see incremental savings in procurement manufacturing operation those are probably the two areas that I would say have the most potential upside and then you know as I mentioned, we also believe that.
There will be some revenue synergies and those have not been included in our our forecasts our target obviously those are going to take a little longer to develop but we believe that there's opportunity there as well.
Perfection less for me some cool, obviously, you mentioned who am lucky.
A lot of color you can pride in the process, but just anything you can you can relay in terms of interest you're seeing confidence that ability to model ties that asset at attracted multiples over the next three quarters.
Yeah. So you know, we're we're running a very discipline process and so we're seeing I would say look the market. This is a very attractive business I think to both strategic you know partners, who buyers as well as financial firms and so.
Financial sponsors. So we believe that there's there are a a good number of potential credible folks you know that may want to acquire partner in some way with this business and so we expect to process to go well, we expect you know the market for this.
This to be very good and so we have a lot of confidence in in the process and you know remained remain confident and and will continue to update as as we can so.
Yeah. So you know it's a good business good financial it's got great financial characteristics very resilient business. It's it's just a very different business from what what we do and and again think it can it thrive and have a better home you know with with with another with another teacher partner or another owner.
Okay very good favorite solo until jumped back thank you get to the color.
Hi, Thanks, Thanks, Dan.
[noise] and once again to ask a question. Please press that the number one.
[noise] [noise] and you have questions on the line of met Somerville.
Yeah, just a one of the follow up on the silk maybe parks out some of the headwinds you saw.
Q1 for a margin standpoint, you manage.
Healthcare costs that sounded somewhat temporary.
Assume you'd be able to maybe give a little bit of color on that and maybe also just what sort of head when you're seen from an A.S.P. standpoint, and why or why not that.
Debate at the end of the damn trying to bridge, how you get from Q1 into your guided range for the year like.
Yeah. So when we when we think about eight so and what happened in the quarter. So there are really two major drivers Matt. It was as you said higher health care costs. So just as a reminder, we are self insured and so sometimes you know those health care as well that those health care costs will go up.
Slightly but we expect those to recover you know as we go forward kind of at a normal level. The second thing this quarter was.
You know, we had our inventory flowing through at a higher value from last year, because we had some inefficiencies in our production last year and so you know that inventory has to be carried at a higher value. So in that flush through the the P.N.L.
That was really kind of like a temporary a temporary elements. So we would expect to see that kind of recover.
As we go forward and we also are experiencing now with our new steel contracts lower pricing and steel and so we expect to get some favor ability there and then Additionally, you know as you know the Batesville business is consistent.
Only you know looking at cost cost reduction Khazanah event.
So they have some productivity projects that are also in the queue for the back half I would say that and then don't forget you know our second quarter is usually when you think about our trends for <unk>. It's always the highest Eva died.
Quarter, primarily because of the volume because the flu season, and so we expect that same business cycle. If you will to happen from first quarter to second quarter.
Got it and then just <unk> with respect to free cash flow what would your free cash flow guidance for to be for the year. If we work backed out I think you mentioned 80 85 million and you know acquisition integration related costs, maybe you want to use a percentage of of men income just talk about maybe what you're free cash range would be for the.
<unk>.
Yeah, we generally guide to free cash flow greater than gap net income and so we still feel very confident about that what I would say is both in our business in the legacy Milacron business. When we think about free cash flow and how that's going to float.
Through the year.
We're going to have a stronger back half of our year than than front half. So we'll have.
Obviously this quarter, we had acquisition and deal costs, we will continue to see some of those really integration costs coming into two.
Coming really out of Q3 in Q4 is when you're going to really see that uptick in a free cash flow, primarily not only because of a greater net income, but also you know we should get a lot of these dealing integration costs kind of out of the way.
Got it thank you guys.
And at this time there are no audio questions.
Thank you operator and in closing I, just want to think everyone participating in the call. Today. We appreciate your interest in Hillenbrand and look forward to speaking with you again in May as we report our our fiscal second quarter results have great day. Thanks.
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