Q2 2020 Earnings Call
A replay of this call will be available until midnight Eastern time May 20, Onest 2020 by dialing one 805 to five phase 367 toll free in the United States in Canada for plus one for 166 to one for 64 to internationally and using the conference I'd number.
Finally 6679 systems.
Webcast will be archived some of the company's website at <unk> Dot Hillenbrand dotcom through Friday June 2020.
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At this time, it's my pleasure to turn the call over to Richard <unk> Director of Investor Relations Mr. Douglas. Please go ahead.
Thank you operator.
Morning, everyone and welcome to Hillenbrand's second quarter fiscal 2020 conference call.
I'm joined today by our President and CEO, Joe Raver, as well as our senior Vice President and CFO Kristina Cerniglia.
Before we get started I want to direct your attention to our supplemental slides posted on our IR website that will be used in today's call.
Let me remind you that our comments may contain certain forward looking statements that are subject to the safe Harbor provisions of the securities laws.
These statements are not guarantees of future performance and our actual results could differ materially.
Also during the course of this call will be discussing certain non-GAAP operating performance measures.
I encourage you to take a look at slides three and a slide presentation, and our 10-Q, which can be found at our website for a deeper discussion of forward looking statements and the risk factors that could impact our actual results.
Well I could approach this called it differently given the current business environment, Joe will start with an overview of the actions. We've taken in response to the Coke 19 pandemic and outline current priorities followed by an update on the operating environment as it pertains to our business.
As our goal to provide investors with insights into what we're seeing in the marketplace.
Kristina will briefly review our fiscal second quarter results and more detail on the actions we've taken to mitigate the financial impact from the pandemic and provide an update on our balance sheet and liquidity and outlook.
With that I'll turn the call over to Joe.
Thank you rich.
Thank you all for joining us this morning.
Clearly the challenges, we're facing with cobot 19 or unprecedented in our lifetime.
Our thoughts with those who have been directly affected by the virus.
And we're grateful for the healthcare workers first responders and the countless volunteers working to stop the spread.
Since the beginning of the outbreak our priorities have been clear first and foremost is to protect the health and wellbeing of our employees and their families.
Second is to continue to meet the needs of our customers many of which operate essential businesses and our directly linked to companies supplying the frontline fighting the virus.
And third is to take actions to help our business is not one navigate this challenging environment, but to emerge even stronger.
As we manage through this challenging very dynamic environment. Our team remains committed to executing against three near term initiatives. We've discussed previously which are one running our core business as well and leveraging the hillenbrand operating model to drive improved top and bottom line performance.
To integrating milacron, and achieving the full strategic and financial benefits of the combination and three generating cash to pay down debt.
We began planning and taking actions early in response to the Cobot 19 crisis as you May remember on our last earnings call. In early February we were already working to ensure the safety of our employees minimizing any impact to our customers in operations and mitigate the risk up.
Options to our global supply chain.
We also established a cobot 19 task force comprised of leaders from across the business.
We implemented a governance structure with a frequent cadence of reviews at the operating company Enterprise and board of director levels.
We've taken decisive actions to protect our employees and provide safe working environment. Most of our office staff are working from home and for those who knew need to be on site, we've instituted enhanced safety protocols and new protections, including additional personal protective equipment or P. P E employee.
Screening a major facilities.
Nickel distancing.
And enhance procedures for sanitizing work spaces.
We continue to monitor and update procedures in line with health policy and government recommendations.
Well the extraordinary efforts of our team who have worked tirelessly to ensure the safety and well being of all of our employees.
Over the years, we've got strong partnerships with our customers across all of our businesses.
Many of the products that we manufacture play a critical role in the central industries, including health and safety food and agriculture infrastructure and death care.
We continue to work closely with our customers to support their needs through this pandemic.
To that end, we've expedited equipment to be used in the production of medical products P. P E and testing equipment in direct response to the critical needs of the healthcare workers and others serving on the front lines.
We're taking steps to support operations and business continuity, including closely managing our global supply chain.
Our significant production sites are currently open and are able to operate at or near capacity.
As you'll recall, we were already working on supply chain excellent excellent activities for the covert 19 pandemic.
In the current environment.
Although we've moved production to various sites around the world to address the rapidly changing global conditions, we have not experienced any major disruptions to date.
We're in close contact with our suppliers to pro actively manage and mitigate potential risk.
As we work to ensure that we can support our customers at the very highest level.
We believe we're in a very good position in terms of manufacturing operations and supply chain network. Thanks to our team's efforts over the past year and early actions as the crisis has unfolded.
Finally, we've taken steps across the organization to proactively manage our cost structure and preserve our financial flexibility.
The two fold goal successfully managing through the crisis in the near term.
And positioning hillenbrand to take advantage of new opportunities and to capitalize on increasing demand as economic conditions improve.
Kristina will cover our cost actions in more detail later in the call.
For more than a decade, we've been on a journey to transform hillenbrand into a world class Global diversified industrial company with a focus on diversifying our portfolio and revenue streams beyond the original Batesville business, which has longer term secular growth challenges.
We've executed on this vision through organic and inorganic means including focused investment in R&D as well as acquisitions and dispositions.
As we executed our strategy.
Our focus has been on growing recurring revenue and acquiring companies in niche markets with core technologies that have compelling cash flow characteristics.
Course underpinning all of our actions has been a relentless focus on continuous improvement enabled by the hillenbrand operating model.
So now let me provide some more insights into the operating dynamics of our businesses.
At the outside of the section. Let me also say that our senior leadership team is no stranger to navigating challenging economic conditions and recessions, we find ourselves in familiar territory again, and we're flexing that muscle.
Let me drill down into our business is a bit.
And given the current environment I think it's useful to think of our businesses in three different buckets.
The first bucket is equipment and systems.
Well, we have long medium in short cycle businesses.
This part of our business were this part of our business was a little more than 50% of our total revenue in the last quarter.
The second bucket is aftermarket parts and service.
This has been a focus of ours over the last few years and makes up about a quarter of our total business.
And the third bucket is the batesville business, which is less sensitive to economic cycles.
Two accounts for a little over 20% of revenues.
In the quarter.
Let me spend a little time on each starting with equipment and systems.
Versus our long cycle business of large polyolefins systems as most of you know this has the longest cycle business we have.
Once we received an order it typically takes four to six quarters to deliver the final products or system.
We continue to receive orders in the second fiscal quarter, which contributed to a record backlog and there's also a strong pipeline of projects that have not yet been awarded.
These large systems have good working capital characteristics due to progress payments that are made as a key execution milestones are achieved.
And because our systems are typically installed towards the end of a much larger project, we don't expect cancellations.
Even into 2008 2009 period. This part of our business did not experience any large project cancellations or see significant delays.
Over the past several years, we've experienced strong demand for these systems and as such.
We've worked hard to develop a more variable cost structure.
Only to expand our capacity, but also that we can react more quickly to any potential downturns in demand.
Given the long cycle nature of this part of our business, we're confident that we'll be able to plan effectively and manage our costs going forward.
We continue to closely monitor capital expenditure announcements made by our customers the large petrochemical companies.
But so far reductions by these companies have been primarily in upstream investments to which our systems are not exposed.
Overall, we feel good about how this business is performing.
Next among quit equipment and systems, our mid cycle capital products.
In this category is the balance of the process equipment groups equipment and systems, including compounding machines feeders separation equipment, crushers and pumps and valves.
Also included in our mid cycle capital products are the milacron injection molding and extrusion product lines.
Once we receive an order for one of these products. It's typically delivered anywhere from one to three quarters in the future.
The first let's start with the process equipment.
These products serve a variety of end markets globally, including engineered plastics recycling food and pharmaceuticals minerals in mining.
Overall demand was down in the first half of the year driven by general industrial weakness with particularly low demand for screening equipment for Proppants as we had expected.
There have been a few bright spots, including strengthen technical plastics in Asia and processed food globally.
The injection molding and extrusion product lines within the Milacron segment are perhaps the most cyclical part of our business.
These products are mostly sold in North America in India with a strong presence with custom molders automotive consumer durables and medical products.
Orders have slowed significantly in North America, and India. The two largest geographic markets for these products as both economies had been hit hard by Cobot 19, and mandatory lockdowns.
We do have a manufacturing presence in India for these product lines and we experienced some delays to customer deliveries at the ended the quarter.
That said our teams are working diligently to ensure supply chain continuity.
However, if we were to experience and extended shutdown in India. It could further negatively affected this part of our business.
Notably we saw sequential sequential increase in orders for the milacron injection molding and extrusion product lines during the second quarter, but that momentum declined sharply in late March.
And as a reference point peak to trough revenue was down about 40% in the 2009 downturn.
However, I want to point out that the business serves a more diversified set of end markets today with less concentration in automotive and.
It also has a more efficient cost structure.
Furthermore, capital equipment sales were down in 2019, and the first half of 2020 and the U.S. automotive market was already soft pre cobot 19. So we believe that we are already we are already well into the peak to trough cycle for this part of the business.
We've taken C. diff significant actions to reduce costs related to these product line, which Kristina will cover in more detail later in the call.
Finally, our short cycle capital equipment includes hot runners process control systems and mold bases that are part of the Milacron segment.
These products move quickly from order to delivery typically in one to two months or less and are sold across our sold across the globe and into a variety of end markets and can including consumer goods electronics automotive medical and packaging.
Demand for this equipment is driven by new product introductions, and Lifecycles and volume.
These product lines were down in 2019 and declined further in the first half of 2020.
Or is it been slow across all regions due to persistently weak automotive demand, which has been exacerbated by the pandemic.
Many customers that put capital spending on hold leading to the deferral of new projects.
Although not a perfect comparison when looking at the 2008 2009 downturn revenues at that time declined about 15% and then snapped back quickly.
Like injection molding. These product lines were already facing softness in automotive and other end markets. So we believe we are already on the way from peak to trough in orders for this part of the business.
So that covers the first bucket being capital equipment is systems and ill now move to the other two buckets more quickly.
So the second bucket is our aftermarket parts and service business.
The part this part of the business grew 4% organically year over year in the second quarter and order rates remained stable.
Importantly, the aftermarket business provides some of our best margins.
While this part of our business declines at the outset of a downturn it tends to come back quickly as production activity rebounds.
Finally.
The third bucket is our batesville business.
Historically this business has been less sensitive to economic cycles and is generated reliable and predictable cash flow.
Batesville experienced pockets of higher demand for burial caskets, starting in late March. It's a trend that continued through April in certain metropolitan areas that have been harder hit by the virus.
Although we may continue to see increased mortality in certain geographic markets in the near term. We've also seen elevated cremation rates the service and off offset to casket demand.
Looking beyond the near term mortality associated with a pandemic. We expect burial demand will quickly returned to normal and resume its long tailed slow secular decline of about 1% to 3% per year consistent with history.
And with little impact from the macroeconomic environment.
I hope that this additional color on the revenue dynamics of our businesses is helpful.
With that let me turn to the Milacron integration.
We have a robust integration plan and our integration team led by a dedicated integration management office is executing against that plan.
Despite the unexpected challenges associated with covert 19, the integration is proceeding well and all in all key work streams are on track to achieve our targeted synergies.
Following the close we quickly executed a number of initiatives associated with reducing redundant public company costs and we're moving forward with our functional integration work streams.
We've made changes to the organizational structure to support value capture across the business.
These changes include centralizing, many enterprise wide functions, including HR finance IP legal and procurement.
From a talent perspective, we've recently brought much on a chief procurement officer.
This has been a welcome addition to the team and has made an immediate impact.
As I mentioned earlier, we are well positioned to realize our targeted year, one cost synergies of $20 million to $25 million within the current fiscal year.
Additionally, we remain highly confident in our ability to achieve our target of $50 million a run rate cost synergies within three years.
And to drive incremental revenue synergies over the long term.
All of our integration 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.
Lastly on the topic of integration, we're very pleased to be able to achieve one of our critical milestones the sale of some cool at the end of March valued at approximately $224 million.
Before I pass the call over to Christina.
To underscore that while the Kobin 19 pandemic has created near term challenges.
We remain committed to advancing our long term strategy. So let me provide a brief update on our strategy.
The first of our four pillars in our long term strategy is to strengthen and build platforms, both organically and through M&A with a focus in niche markets, specifically plastics and chemicals food and pharma and separation.
The acquisition of Milacron ads to solid platforms to hillenbrand portfolio and gives us strong complementary product and technology positions across the plastics value chain.
We now have leading positions in base resin production engineering plastics and plastics processing, we're plastics are shaped into end products.
In addition, we're well positioned and continued to have continued to have success in the small but growing recycling market.
We expect to leverage these strong positions to cross sell product line expand our combined product offering in key markets and over the long run to share technical know how to win in new markets and applications such as biodegradable plastics.
We expect demand for plastics to continue to grow over the long run, particularly particularly in industries that are increasingly recognizing the benefits of durable plastics, including medical products with an increased focus on safety improve drug and therapy delivery and durability.
Consumer goods in construction were plastics improve durability, and weve and require less maintenance.
And transportation as Lightweighting becomes more critical with demand for more fuel efficient vehicles and electric vehicles.
Our second strategic pillars to leverage Batesville for cash.
Hey, Joe has a long history of manufacturing excellence and has deep and longstanding customer relationships that make it a leader in the North American death care industry.
We run this business for cash and it continues to provide the cash flow the cash flow for us to diversify our revenue streams and offset long term risk associated with the burial casket market.
It has been historically less economically sensitive and as provide stable and predictable cash flow that is more important than ever in today's environment.
The third pillar of our strategy is to build a scalable foundation for growth using the hillenbrand operating model.
With the acquisition of Milacron, we see the opportunity to build World Class Center led processes in areas such as finance.
Human resources, and procurement that leverage best practices, and our increased scale to drive margin expansion in working capital improvements.
From an operational perspective, we are focused on continuing to improve manufacturing and supply chain productivity across the enterprise and are focused on expanding margins and reducing inventory, particularly in the newly acquired injection molding and extrusion product lines.
Our legacy Hill Hillenbrand margin performance. This this quarter is a direct result of the operating model being consistently deployed throughout both batesville and the process equipment group.
And we see significant opportunity to roll out the operating model throughout the Milacron segment.
Our fourth and final pillar is to effectively deploy strong free cash flow.
We have been clear that we are reshaping our portfolio through organic and inorganic actions and that it will take time to achieve our end state goal of becoming a world class Global diversified industrial company.
We believe strongly in the compelling long term strategic merits of the milacron transaction.
We have a track record of maintaining a flexible balance sheet to go to grow through strategic acquisitions and the history of quickly paying down debt post close.
We are employing that playbook and prioritizing debt pay down.
And while the Cobot 19, Pant pandemic is creating unforeseen challenges we are confident in our ability to effectively generate free cash flow to do so.
With that I'll turn the call over to Christina.
Thanks, Joe and good morning, everyone. Thanks for being with US today I hope everyone is safe and healthy during these extraordinary time.
We delivered solid operating results for the quarter in the face significant uncertainty highlighted by revenue growth and Batesville and one of the strongest quarter as we've ever reported for order intake in the process equipment group.
Which resulted in record backlog of nearly $1 billion in the segment.
We also drove year over year margin expansion in each of our legacy hillenbrand segments.
In addition, we completed our first full quarter with milacron as part of Hillenbrand and as Joe said, we completed the sale of the simple business.
Proceeds from the divestiture meaningfully strengthened our financial position and provided additional flexibility.
In the second quarter, we delivered total revenue of $649 million, an increase of 40% primarily driven by the milacron acquisition.
Organically revenue decreased 3% or 2% excluding FX.
Batesville business and large plastics projects remained resilient in the face of a challenging conditions, partly offsetting weaker results across our other industrial businesses.
Adjusted EBITDA of $111 million increased 48%, primarily due to the milacron acquisition and adjusted EBITDA margin increased 90 basis points.
Organically adjusted EBITDA increased 5% and adjusted EBITDA margin increased 140 basis points.
We reported a GAAP net loss of $74 million for 99 cents per share a decrease of $1.59 per share primarily as a result of non cash impairment charges plus acquisition related expenses.
Specific to the impairment.
Current economic conditions resulted in us performing assessment.
The current values of the company's reporting unit.
As a result of our assessment, we recorded non cash impairment charges of $83 million, primarily related to our flow control businesses.
Adjusted net income of $40 million resulted in adjusted earnings per share of 53 cents.
A decrease of 10 cents.
Or 16%, mainly driven by incremental amortization and interest expense related to the milacron acquisition.
The adjusted effective tax rate for the quarter with 28.1%.
An increase of 220 basis points, largely due to unfavorable geographic mix of pre tax income and an increase in the reserve for unremitted taxes.
Hillenbrand generated cash flow from operations of $28 million in the quarter, an increase of 150 per cent compared to the prior year, primarily result of improved working capital requirements, partially offset by increases in payments for interest and acquisition display.
In addition, and integration costs.
Our legacy Hillenbrand businesses continued to perform exceptionally well in terms of working capital management.
We delivered working capital turns of approximately nine times in this part of the business in the second quarter.
We continue to look at all aspects of working capital, including aggressively managing accounts receivable and optimizing inventory level.
We are working with our suppliers and our customers to negotiate better terms as we seek to strengthen our balance sheet and maximize cash flow.
With milacron, we see clear opportunity to leverage the hillenbrand operating model to drive more efficient management of working capital across the segment and improve our ability to generate cash.
Capital expenditures were approximately $9 million in the quarter, and we returned $16 million to our shareholders in the form of cash dividend.
Moving to segment performance I'll start with Batesville.
Batesville revenue of $139 million increased 1% year over year.
That was a good result.
Batesville unit volume increased despite lower estimated demand for burial caskets.
We did not see a pronounced impact from the Corona virus in the second quarter results outside of a few specific metro areas, where we started to see higher burial demand in late March but as Joe said that trend accelerated in April.
By contrast, the estimated mortality rate associated with the flu was relatively low in the quarter.
Another positive for Batesville, adjusted EBITDA margin of 23.1% expanded 20 basis points in part as the team continue to leverage the hillenbrand operating model to drive both productivity and volume initiative.
Process equipment group revenue of $311 million decreased 5% compared to the same period in the prior year.
Excluding the impact of foreign currency exchange revenue decreased 3%.
We continue to see strength in demand for large projects for base resin production in the aftermarket parts and service revenue grew 4% in the quarter.
Offsetting this growth was the expected decline in sales of separation equipment for profit production, which accounted for a decrease of approximately 3%.
We also experienced constrained demand for small to midsize capital equipment, and some other industrial end markets and challenging macro condition.
The process equipment group did not experience a significant impact of second quarter results from Cobot 19.
Adjusted EBITDA margin of 18.5% increased 150 basis points, primarily due to pricing and productivity improvements and focused efforts on discretionary operating expense management.
We continue to leverage the hillenbrand operating model to drive efficiency and reduce costs across the business.
Our global procurement initiative was a significant contributor to this quarter's productivity improvements and we expect this initiative to drive additional benefits going forward.
Unfavorable mix offset part of the margin expansion with the increased proportion of lower margin large systems projects and the decline in demand for higher margins separation equipment.
Order backlog grew to a record $982 million at the end of the second quarter up 2% year over year.
Excluding the impact of foreign currency exchange backlog increased 4% and hit the 1 billion dollar Mark.
Large polyolefin systems orders drove the majority of the backlog growth in backlog increased in each of the process equipment group businesses with the exception of the separation business.
Backlog was up 9% sequentially.
Milacron revenue of $199 million decreased 20% compared to the comparable period in the prior year before the acquisition.
Entering the quarter, we were already experiencing soft demand for injection molding equipment, and hot runner systems, and certain end markets, including automotive.
The situation was exacerbated by coven 19, with temporary shutdowns in China, and India affecting operation and placing further demand pressure globally.
We were able to mitigate the direct effects of the shutdown in China early in the quarter by tapping into the agility of our supply chain and shifting production of certain key product line to sites in Canada in India.
Later in March when India shutdown, we shifted the other direction as China was back up and running.
Given the timing of the shutdown in India. It did impact our ability to ship some orders on time.
We estimate that the impact of shipping delays related related to cobot 19 to be approximately $15 million of revenue in the quarter.
Adjusted EBITDA of $32 million decreased 32% and adjusted EBITDA margin of 16% decreased 290 basis points as cost out initiatives could not offset the fixed cost.
What our backlog of $187 million decreased 17%.
To d. leveraging.
We previously announced the suspension of Sherry purchases and the curtailment of M. an activity, while we prioritize d. leveraging and focus on the integration.
Given the current global economic environment and continued uncertain a year round covert 19, we have taken decisive action to mitigate the financial and operational impact on the business, while protecting our ability to continue to generate profitable growth over the long term.
Let me detail some of the actions we've taken to date to reduce near term costs and support our free cash flow.
We cancelled merit base salary increases for salary U.S. in Canada based employees and Joe took a voluntary 30% reduction in the salary.
The board of directors voluntarily waved at scheduled cash compensation increase for 2020.
We've reduced discretionary spending such as travel and marketing expenses.
Suspended all hiring activity, except for our most critical open position.
We've pulled back on capital spending well prioritizing critical maintenance safety and regulatory projects and high R.O.I. growth investments and finally, we've implemented furloughs and reduced work arrangements in certain businesses that have experienced lower customer demand.
In total we expected these cost containment actions to result in near term savings of approximately $25 million.
We're continuously reevaluating these actions and additional lovers to manage our costs as the situation evolved.
We've also made structural changes and targeted areas to optimize our footprint and right size certain parts of the business that were already experiencing sustain slowness before the onset of covert 19.
These changes primarily impacted the Milacron's segment, as we close to small facility and reduced headcount in the corridor.
At the same time, we continue to make key investments in support of the future viability of the business by innovating and strategic growth areas, such as technical plastics and recycling and by leveraging digital technology to advance our service delivery model.
Oh, now turn to our outlook.
We announced last month that we have temporarily suspended fiscal 2020 guidance as we cannot predict with certainty how long the disruptions from covert 19 will last or how deep the economic impact will be.
With that in mind, we want it to provide additional color to help you understand how our business may perform over this quarter and beyond.
Do that and we have developed multiple scenarios modeled on assumptions around the depth of the economic adversity, the duration of the recession and the shape of a recovery.
These scenarios range from a near term recovery with minimal incremental disruption to more severe cases that include pro long to recessionary impacts well into next year.
Joe discussed the operating dynamics of our businesses and all provide more detail on how we expect them to perform in a recessionary environment.
Provide an update on the trends we saw in April.
And our long cycle large polyolefin projects are record backlog provide support for our business over the next 12 months.
We have high confidence in these projects moving forward.
The pipeline of new opportunities also remain strong.
Well, we could see timelines lengthen or order intake soften in more severe scenarios. We expect this business to provide a solid base of revenue and cash flow for at least to the next year.
The Midcycle portion of the portfolio is more cyclical and we experienced increased softness across these businesses in the second quarter.
In the case of a prolonged recession. This trend would likely continue we also expect these businesses to rebound fairly quickly during recovery based on their history.
The short cycle capital equipment, including Hochbrueckner system moves in and out of cycles quickly.
The business was already operating at a low level relative to recent history, and it's likely to remain low through recessionary period.
As the economy starts to improve we believe this business will quickly returned to growth.
Falling past industry downturns. This business has experienced an accelerated recovery before returning to long term average growth rates, showing resiliency and inability to capture pent up demand.
We expect to see a similar response as product refreshments and new models begin to pick up steam in areas like electronics and consumer goods.
The aftermarket portion of our business provides a solid base of high margin recurring revenue and historically is not as sensitive to short term demand fluctuations and provides a buffer when capital sales are down.
Finally, we expect the batesville business to be resilient, even in a difficult economic environment.
In our experience.
Burial demand has remained stable in the face of economic downturns.
Baseball has continued to provide an important source of stable predictable cash flow, which is especially valuable in periods, where our other businesses are facing cyclical pressure.
Let me provide some insight into the sales trends we saw through April in each part of the business starting with a capital equipment in systems.
In our long cycle large polyolefin business, we continue to seem normal custer be hate customer behavior in projects have remained on track the pipeline remains healthy.
The mid cycle portion of the business is where we experienced the most pressure in April as orders continue to trend down.
Customers scaled back capital expenditures for compounding machines and material handling system, especially in the U.S. in Europe.
Injection molding and extrusion orders slowed significantly and our two largest markets North America in India as both economies were hard hit by Coven 19, and mandatory lockdown.
Orders also continued to slow in our separation crushing and flow control businesses.
Short cycle capital equipment was a bright spot as orders started to rebound in late March as China returned to work following extended shutdowns.
Order rates continue to increase in April with improvement in Europe, and as and as medical and farmer projects increased in response to cope with 19.
Moving to <unk> aftermarket parts and service.
In April we saw orders for spare parts slow and our field service organization was constrained by travel restrictions globally, which limited their ability to go to customers locations incomplete service assignments.
If we see similar trends continue over the next two months, we would expect near term detrimental margins for process process equipment group and Milacron's segments to be approximately 40 per cent.
We are monitoring the situation closely and if the severity or duration of the recession worsens, we will deploy additional cost management lovers to help offset a portion of the margin loss.
Finally, batesville experience pockets of higher demand for burial casket starting in late March that trend accelerated in April resulting in a strong year over year sales increase for the month.
Given the historical resilience of the business, we continue to expect Batesville adjusted EBITDA margin to be approximately 20 per cent for the fiscal year.
In the summary, we believe that the diversity of our portfolio provides balance as we managed through a very challenging and uncertain period.
We have stress test at our business against multiple scenarios and even in our most pessimistic case, we continue to forecast positive free cash flows.
If a recessionary environment, where to persist or deteriorate further there are additional lovers, we can pull to protect the long term viability of our business.
Before I turned the call back to Joe I want to discuss the financial reporting change we were making.
Beginning in the fiscal third quarter of 2020, we're updating our definition of adjusted earnings per share to exclude the impact of acquisition unrelated intangible amortization.
As we consider the effect of the Milacron acquisition. We believe this approach will better reflect the company's true performance.
Put this change in perspective, if we were to apply it to our second quarter results adjusted earnings per share or would be 70 cents versus the reported 53 cents <unk>.
Excluding $18 million of intangible amortization in addition to the backlog amortization already excluded.
Now to summarize we're focused on maximizing our financial strength and flexibility. During these uncertain time without sacrificing our ability to capitalize on economic recovery in advance or long term profitable growth strategy.
We believe the actions we have taken to maintain financial flexibility and reduce costs make us well positioned to navigate the challenges ahead.
And now altering the call back over to Joe.
Thanks Christina.
We may I see the challenges of coping 19, I want to emphasize that are long term profitable growth strategy remains intact.
Averaging the hillenbrand operating mile to manage the business in the challenging demands environment and we're being mindful of books, a short and long term implications of the actions were taking in our business.
Or team remains committed to running or core businesses, well integrating milacron with excellence and driving synergies in generating strong cash flow to pay down debt.
We've taken decisive action is both to whether the challenges brought on by coded 19.
And a position hillenbrand to emerge from the crisis in a position of strength when mark conditions improve.
Finally, I'd like to take this opportunity opportunity to recognize and think the entire global hillenbrand team for their focus on protecting our people while serving our customers.
I believe they're outstanding commitment to our objectives will help us emerged from the crisis stronger than ever and create meaningful value for all in one brand stakeholders.
What's that will open up the line for your questions.
Thank you.
Ladies and gentleman in order to ask a question fresh Sars on the number one on your telephone keypad.
Your first question comes from Daniel more a C.G.I. security.
Okay.
<unk>.
Operator over Europe.
Oh can you hear me Hey.
Hey, Dandy up your we didn't we we're we're not able to hear you until just a second ago <unk>. Okay <unk>.
Great just looking at the the the outlook for fiscal Q3.
Expected performance to be lower and you over your just maybe defined performance I assume that's you know both revenue and you, but overall and maybe remind us of you know what the pro forma numbers look like for two three and Q. for last year with Milacron included and then excluding some cool so we have sort of the right.
Face to think about.
Sure. So you know as we as we talked about lower here every year, that's on on a pro forma basis for both revenue and eat <unk>.
To put it in perspective 2019 revenue on a consolidated basis for a third quarter was $688 million and Eva die with $108 million.
Yeah.
Perfect do you have those numbers for Q. for just as we think about the rest of your as well.
Sure Q. for would be $706 million for revenue and $120 million for <unk>.
Excellent.
In terms of I'll jump around a little bit forgive me covered a lot of ground, but in terms of the balance sheet, you know down to three and a half times leverage obviously, you build a will be a little bit lower at least for the next quarter. If based on your current view of the world.
Maybe talk about the positive potential for positive free cash flow to offset that in other words you know.
You see ending finishing fiscal year, roughly where you are a little bit higher leverage a little lower you know <unk> <unk>. Your best guess in terms of tea leaves would be helpful. There.
Yeah. So obviously these are challenging times, so very difficult to estimate where we will end up I think as we look at let's just say, let's take this quarter you know we were able to generate.
Solid operating cash flow when you think about or business typically we generate more cash flow on the back half of our business than we do the front half of our business now without being sad I would expect you know that to happen again this year.
But probably not to the extent that we were originally forecasting a going out for guidance. So.
<unk> again positive free cash flow, while <unk> will be lower I think you heard we had really good performance on working capital on our legacy Hellenbrand business. We will continue to remain very focused on working capital managing are working capital.
As well not just in the legacy Hillenbrand business, but also milacron businesses as well.
Mhm.
Helpful I'm going to stay on the balance sheet for one more it you know any additional lovers to poll in terms of delivering and you mentioned one option you know in terms of so satisfying that near term did payment being happening in the public debt markets.
Do you see the public that markets as being open that receptive currently at levels that would be acceptable to you.
Yeah. So markets are volatile as you know and so they started opening up last week I I would hope that they continue to remain open but yes, we would we would look at that as an option.
As we go forward I think some you know other areas I think we mentioned in the script, but I'll just I'll I'll highlight again.
As we continue to to look out lovers, we've obviously reduced our our cat backs.
And will continue to monitor that very closely we do have some properties that are a vacant and we are looking to to sell though so there's you know another couple of lovers.
Not significant but you know we have a pool of action to take.
Perfect last for me.
Very helpful. In terms of the the color you give kind of peak to trough for the the two pieces of Milacron's remaining business or.
Enters an injection molding, maybe you know in terms of coming out of recessions remind us you know what type of whether it be your lawn or a you know sort of initial acceleration and gross those businesses have seen in the past and this may be the same are different. Thank you for the color again.
Yep. Thanks, Thanks, Dan.
In terms of coming out of downturns I would say you know starting with the the the more short cycles businesses Hot runner systems and control systems used in hot runners and mold parts that comes back pretty quickly and so you know we've looked back historical yet at the last decade or more and you can.
See when the when the business goes into a downturn. It comes out pretty quickly again those are pretty short cycle products. In some cases, we're delivering in a couple of weeks, but but typically you know one to two months in terms of delivery. So you can see those come back pretty quickly.
You're just as a side note related to that yeah, we did see China dip at the beginning of a quarter as you know and then it came back strongly at the end of the quarter in March. So you can see it happen pretty fast. So that's the the short Psycho business, Oh say the injection molding extrusion business <unk>, that's a longer cycle and so you know that's.
You know kind of a six to nine months to come out of a downturn in that in that business and so I think that's how you can think about the injection molding, yet extrusion business and how it comes out.
Clearly an injection molding extrusion business, there's an element of parts and service.
Behave more like or you know the the overall parts and service business, where it comes in and out a lot faster in the downturn.
Hopefully I'll get back with any follow ups. Thank you.
I think Sam.
Your next question comes from my Somerville do you do.
<unk>.
Thank you couple of questions first just on the deck <unk>, that's 40 per cent absent the cost actions you have taken albeit gore discretionary in nature, what would detrimentals have look like absent those and then could you talk about what that next layer of cost cuts might look like.
Where ultimately if you know.
Backs against the wall per Se ultimately, where do you think you could hold decrementals. If you were to go after that mixed layer.
Yeah, so as it relates to the detrimental before the the kind of the discretionary items I mean, I I don't think that it has.
Significant impact on the deck or mental where we're going to get the significant impact on the detrimentals taking out more of our fixed cost and so as an example, you know we this month in April we just shutting down one of our smaller.
Locations and Atlanta and.
Actions like that would decrease the detrimental we will look to take more significant actions like those that I just mentioned.
Depending on the depth of the scenario and ideally you know we wouldn't be able to.
In probably the milacron business keep the duck or mental to about 35% with some things that you know, we we could we could trigger and some of those things are more you know getting rid of that fixed cost if you will.
And then just <unk> with respect to be April comments is there any way that you can give maybe a little bit of of qualification around maybe how revenue trend did in in those sort of buckets, whether you want to talk about long needs. You know short cycle piece or just you know though.
P.G. versus milacron versus base, we'll just you know give us ooh more tools, if you will to hold model or so.
Yeah, So I I'm I'm happy to do that so with Batesville I would say high you know, we said very strong year over year growth.
Hi single digit growth here every year that we saw on April.
As we you know come down to let's just say that the hag business are the peg segment, rather I would say that you're April was.
Probably similar to what we saw in for the quarter. So down I would say single mid mid single digits and then you know the Milacron's segment really was down.
Quite substantially in part because India, our manufacturing location in India remained closed and so typically we would ship out of that location. We didn't really have a much shipments coming out about location. So if I were to look at.
The total milacron segment.
It was probably down very similar.
To where we were again endings, you know the quarter, so round that 20 per cent down or so.
Mm.
No, but I would <unk> I yeah, yeah. So so I I think not just one one other thing I would expect obviously as India. Because again. This is April so it was India opens up.
Should be able to to recover a little bit and then same thing on the process equipment side of the business. You know we are things flown s. and aftermarket primarily because some of our customer locations are closed and we just can't service.
Service the the customers and so that was also what I, an indication of April which might change might not.
Got it thank you for sure.
Yeah.
Your next question comes from Joan friends of <unk>.
<unk>.
Yeah, just a quick question on the balance sheet first.
Went behind the pursue fortunate so simple when you did but we went behind decision not to put the cash from that sale to debt repayment and also I haven't heard you mention anything about the dividend is that also on the table, if you need need to cash.
Yeah, so as it relates to the cash from the sale of some cool you know it is something that we were really happy to get completed in the corridor I I would say that we took a defensive posture in the quarter or early in the quarter, just really not knowing what was going.
<unk> so essentially what we did is you know we we just took that cash kept it on the balance sheet in case of the unknown and so I think you know as we were.
<unk> about what we were going to do we want to to make sure that we we took that defensive posture and took the cash there's really nothing more behind it I think there.
A lot of companies that that drew cash it and took cash on their balance sheet. We did something similar or just you know not being familiar with what was going to happen in the future as it relates to the Devananda also Passover job as it relates to the dividend.
As Christina mentioned earlier, we we modeled a bunch of different scenarios and it's you know even in the worst scenario expect to be cast positive all those scenarios <unk> you know ah contain continuing to pay the dividend so.
Today, we expect to continue to pay the dividend clearly, it's a challenging environment. We can't see forward you know that's a lever that we that we would have but are currently as we see the world today, it's not something that we would expect to do but will continue to monitor and you know the board will make that decision really quarter by quarter.
Oh.
Okay and one more question like hand, you mentioned to flow control sorry. The business was we we had to write down associated with some of those businesses can you talk a little bit symbols and markets. How those markets <unk> particular in April versus March or you can avoid touched on auto side.
What's going on there and what's going on in crop in some some of those.
Is what you're seeing what your customers are telling you.
Yeah. So I think is Christina mentioned that that that impairment was triggered by really the current economic environment. And then you know we're very focused on building the larger a platform businesses in the company, particularly now with you know <unk> conserving cash.
And so we're being very thoughtful allocating cash to the highest return highest return projects that we can and so we expect that to to be more line with some of the larger businesses from it and market perspective, you know we've seen weakness in the industrial markets that we serve both in in.
Europe with on business and in United States with about business I would say also some the larger project.
Larger projects that we tend to do some of those related to energy and mining they tend to be more global international projects in emerging markets. We've seen some softness in those projects as well so the municipal municipal side of the business in the U.S. is is doing okay tends to come.
Into a two downcycled later, so you know we'd expect to see that a little bit later, if the if the downturn continues.
But again those are good businesses with good margin profiles and you could cast generation, but but given the current environment and you know our strategic focus on the larger platforms, especially as we're conserving cash that that led to the the analysis any impairment.
Okay. Thanks, guys will get back in school.
Your next question comes from Daniel more of C.G.S. secured.
<unk>.
Thanks again.
We've talked about this in in recent quarters, but I think lost and all this is that that you know the winter written pagan and the the backlog in an opportunity set has held up a really well. So maybe just talk about your when rate in larger Polyolefins systems, you know, which has it where it is relative to a couple of years ago, what's driving.
And how sustainable.
Yeah, Dan you know I agree with you. We the team is done there really I think a a terrific job in terms of continuing to innovate a continuing to offer solutions and solving customer problems that we believe give us a competitive advantage and so.
You know again, we we continue to see strength, we continue to see our when rate grow. It's these are long term games right. There are only a handful of these projects that are there are worded every year. So so really it makes sense to look over a long run and how the business is doing it I would I think I would say.
You over the last few years, we've we've won more than our fair share of these larger project and again a lot of it is due to innovations that the team has been developing over the last several years, they take awhile to get to the marketplace given the length of these cycles, but we remained remain very.
Positive about that business and and then also the team is just an executing like crazy. So it's one thing to win the business. That's another thing to be able to go execute the project, particularly when you're doing high volumes Yo flawlessly and and maintaining margins in delivering a high quality project too.
To to our customers and they so they're not only been waiting, but they've really been executing in that business and and again, we feel good about that business today as well as going forward.
Very helpful. Thank you again.
Yep. Thanks, then.
And there are no further questions overturned mccall to where prisoners.
[noise]. Thank you operator again, you know it's challenging environment out there right now I have to complement the team I think we have a very strong team strongest team since I've been here and hillenbrand, they've done a great job executing the challenging environment all away from the base so business getting the same.
Cool divestment done in the corridor, you know improving margins on the process equipment side, the integration on track or even in a challenging environments. The integration on track and you're the things that we can control you know our focus is execution executions execution and so.
We're we're confident nor ability to steer the company through this crisis and it really come out on the other side of the crisis in in a much stronger way both process wise, but also competitively position in a stronger manner. So without just want to say thanks for joining us on the call. Today are we look forward to talking to you again to discuss.
Third quarter fiscal third quarter results in August thanks, everyone and have a good day.
This conclusive news conference call you may not discuss.
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