Q3 2020 Hillenbrand Inc Earnings Call
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Good morning, everyone and welcome to Hillenbrand Derrick Wonder if he's got 2020 earnings conference call. A replay of this call will be available until midnight Eastern time August 28, 2020 by dialing one 805 eight.
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Webcast will be archived on the company's website at H. TPP Colin forward Slash forward Slash I, our dot hillenbrand dot com <unk>.
He Friday September 4th 2020.
If you ask the question during today's call. It will be included in any future use at this recording.
Also note that any recording transcript or other transmission at the text or audio it's not permitted without hillenbrand's written consent.
At this time, it's my pleasure to turn the conference over to reach deadly director of Investor Relations Mr. Deadly. Please go ahead.
Thank you operator, good morning, everyone and welcome to Hillenbrand third quarter fiscal 2020 conference call I'm joined by our President and CEO, Joe Raver, and our senior Vice President and CFO Kristina Cerniglia.
I want to direct your attention to the supplemental slides posted on our IR website that week that will be referenced on todays call.
Turning to slide three such friendly reminder, that our comments may contain certain forward looking statements that are subject to the safe Harbor provision of the security book.
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.
Putting pro forma comparisons for our Milacron segment.
Encourage you to review slide three of the presentation and our 10-Q, which can be found on our web site for a deeper discussion of forward looking statements and the risk factors that could impact our actual results.
With that I'll turn the call over to Jim.
Thank you rich and good morning, everyone.
Thanks for joining us today and from all of US Hillenbrand, We hope that you and your families are doing well staying safe.
I'd like to begin by acknowledging the tremendous efforts of hillenbrand's employees as we manage the business through the unprecedented challenges brought on by the Cobot 19 pandemic.
We remain steadfast in our commitment to ensure the health and wellbeing of our employees and their families to meet the needs of our customers.
And to execute strategic initiatives that we believe will position hillenbrand well for the future.
Our team is quickly and effectively adapted to significant changes over the past few months, including new working environments and new ways of serving our customers.
Well changes magnitude is never easy or team is resilient, you're accustomed to challenging and changing the way, we do things and always looking for opportunities to improve.
Part of our culture and reinforce everyday by the Hillenbrand operating model.
As a result of these efforts we delivered a solid third quarter was outstanding performance in the Batesville business.
Other than expected results in our industrial businesses exceptional margin performance across the enterprise and strong free cash flow.
Before I turn to the details on a quarter I want to spend a few minutes on our long term strategy.
As many of you know our vision is to transform hillenbrand into a world class Global diversified industrial company with a proven track record of success driven by the Hillenbrand operating model.
The acquisition of Milacron is a meaningful step forward in the execution of our strategy.
Over the past few years, we've consistently articulated for key pillars to our strategy.
The first is to strengthen and build business platforms, both organically and through M&A.
Milacron is added to sizeable complementary businesses to the hillenbrand portfolio.
We expect to leverage our strong positions in the plastic value chain to cross sell product lines to expand our combined product offering in key end markets.
And over the long run leverage our combined technical know how to win in emerging segments, such as recycling and biodegradable plastics.
Despite the challenges associated with the current macro environment.
And a number of our key end markets, we remain bullish on the long term financial and strategic value, we can create through the milacron acquisition.
As we've previously communicated we continually review the makeup of our portfolio as a management team and do a formal review of the portfolio with the full board at least once a year.
Coming out of our most recent portfolio review, we identified certain smaller businesses that we believe our sub scale and non core as we execute our strategy to continue to strengthen our larger platforms.
Specifically, we've made the decision to divest our terrasource and flow control businesses and have started the process of getting these businesses ready for sale.
We're cognizant of the fact that the current economic and market conditions may have an impact on timing and we'll keep you updated as appropriate.
Our second strategic pillar is to manage batesville for cash.
They still has a long history of manufacturing excellence and deepen longstanding customer relationships that make it an industry leader base will continue to provide strong free cash flow for us to invest in our industrial businesses and offset long term risks associated with decreasing burial demand.
And is historically been less sensitive to economic cycles as.
It has provided stable and predictable cash flow.
Bates those results for the quarter underscore the importance of its role in our portfolio as it generated strong cash flow in a very challenging macro environment.
That cash flow helped us pay down debt and strengthen our liquidity and balance sheet during the quarter.
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 deploy our model to drive significant improvement in the business.
From an operational perspective, we're continuing to improve manufacturing and supply chain productivity across the enterprise and we're focused on expanding margins and reducing inventory.
And I would say theres, a particularly strong opportunity for improvements in the milacron injection molding and extrusion business.
Our margin performance in the legacy Hillenbrand businesses. This quarter is a direct result of the operating model being consistently deployed throughout both batesville and the process equipment group.
And as I, just mentioned, we see significant opportunity as we continue to roll out the operating model across 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 then it'll take some time to achieve our end state goal.
We have a track record of maintaining a flexible balance sheet to grow through strategic acquisitions, and a history of quickly paying down debt post close.
We're employing that playbook and prioritizing debt paydown and while the cobot 19 pandemic is creating unforeseen challenges we are confident in our ability to effectively generate free cash flow to do so.
Lastly.
On the topic of our long term strategy, we announced yesterday the election of a new member to our board of directors.
I'd like to welcome Jennifer runs either hillenbrand, Jennifer brings experience and skill set well aligned with the company's profitable growth strategy and the management team looks forward to working with her and benefiting from her perspective and expertise.
Okay now, let me turn to some execution highlights for the quarter.
As we manage through this challenging and very very dynamic environment. Our team remains committed to executing against the three near term initiatives. We've discussed previously and they are first running our business as well and leveraging the hillenbrand operating model to drive improved top and bottom line performance second integrating.
Milacron and achieving the full strategic and financial benefits of the combination and third generating cash to pay down debt.
Regarding our first near term priority the company performed well against the backdrop of an incredibly challenging environment.
Batesville delivered very strong year over year revenue growth as the business responded to the needs of communities that have been deeply affected by cobot 19.
We were well positioned to handle the increase in volume and the results for the quarter reflect that.
Over the past few years. The team has made significant progress in simplifying the business and improving and an improving the supply chain.
And that was evident in the way Bates, who is able to flex in response to spikes in demand.
And drive the benefits of operating leverage to the bottom line.
As expected the process equipment group and milacron segments were impacted by softening demand as the effects of cobot 19, exacerbated already challenged industrial end markets still results were better than our internal expectations.
Despite lower revenues, we delivered record process equipment group adjusted EBITDA margin and held pro forma milacron, adjusted EBITDA margin essentially flat year over year.
Notably combined backlog totaled over $1 billion and held up relatively well against the coated 19 pandemic.
We continue to closely monitor the pipeline, while remaining remaining focused on delivering our significant backlog.
Now, let me move to the integration milacron, which is progressing better than expected, especially when we factor in the limitations on some integration activities do coated 19.
We're on track to realize the targeted year, one cost synergies of $20 million to $25 million within our current fiscal year.
Which is a faster pace than our original expectation.
As we executed the first wave of integration initiatives, we identified additional near and mid term opportunities.
This coupled with the results we've achieved to date gives us increased confidence in our ability to capture more synergies as a result, we are increasing the all in three year run rate synergy target by 50% to $75 million.
Our dedicated integration management office and integration teams are focused on integrating and optimizing manufacturing.
Procurement and key functional operations.
We're working on vendor and contract consolidation and moving toward centralized functions and centers of excellence.
We believed that our effort to standardize processes and services and leverage best practices across our operating companies globally will drive meaningful efficiencies improve effectiveness in quality and provide a scalable foundation for future growth.
We're also driving efficiencies and best practices in our operations by leveraging our combined spend through our global supply management group and of course, driving lean business practices, which are at the core of the hillenbrand operating model.
Finally, as the economy improves we're focusing on efforts to capture revenue synergies, which are not included in the $75 million target.
Overall.
We're pleased to report very good progress related to the integration.
Our third near term objective is to generate cash and pay down debt.
All three segments delivered solid cash flow in the quarter on the strength of our operating results as well as the benefits from actions, we've taken to reduce expenses manage our cost structure and preserve our financial flexibility.
We were pleased with our cash performance for the quarter.
We meaningfully improved the health of our balance sheet.
While we are aggressively managing our business in the context of the current challenging economic environment. We remain laser focused on our long term strategy and investing for future for the future with a focus on product innovation and quality.
Increased productivity and serving our customers at the highest level.
Okay.
As I did last quarter, let me now provide additional insights into the operating dynamics of the business during the quarter.
As a reminder.
Might be helpful to think about our businesses in three buckets.
First is capital equipment in systems, which comprised long medium and short cycle businesses.
This part of our business accounted for 53% of total revenues in the third quarter.
The second bucket is aftermarket parts and services.
Which contributed about 24%.
And the third bucket is batesville, which accounted for 23%.
Our long cycle large polyolefins systems have been an area of strength for several quarters and generally behaved as expected. This past quarter, we've been winning in this part of the business with our state of the our technology and expertise in high capacity polyolefin production plants and our global footprint.
We are unique and offering complete systems that have both extrusion and the material handling equipment to go with it and were network globally to offer customize support and system design and implementation.
This allows us to engineer and fine tune complete systems for optimal performance and efficiency.
We can also deliver increased throughput for more efficient equipment that requires less overhead in energy to operate resulting in lower total cost of ownership for our customers.
We believe these are real competitive advantages and have helped us grow over the last few years.
Revenue in order momentum for our long cycle business slowed in the third quarter at the impact of Cobot 19 contributed to customer delays in both the execution of current in process projects and to the inflow of new orders.
I do think it's important to highlight that we remain very engaged with customers and has not experienced any large project cancellations to date.
The project pipeline remains solid and we expect to see continued strength in this part of the business as macroeconomic uncertainty receipts.
Our mid cycle capital equipment products, including Compounders feeders, and separation equipment in the process equipment segment.
And injection molding and and injection molding and the Milacron segment.
Continued to face weaker demand during the quarter as we expected.
Sales and orders were down broadly across this part of the portfolio Cobot 19, further pressured already softening industrial markets.
The injection molding business was hit, particularly hard by continued weakness in automotive and other end markets. Although we did see increases in orders for medical products and consumer goods.
North American India are the two largest geographic markets for injection molding business and the government mandated shutdown in India also had an impact on the quarter.
Offsetting some of this weakness in our mid cycle product lines are gains we've made in projects for the production of highly technical engineered plastics systems.
This is another area, where we've been very successful, particularly in Asia, where we're seeing long term investment from our customers. We have leading technical know how and occur and can imply many of the same innovations from our larger polyolefins systems to these engineered plastics projects.
We have successful reference lines in place demonstrating our applications expertise and we believe this opportunity for continued growth in this part of our business.
Finally, our short cycle capital equipment products.
As a reminder, this group includes hot runners process control systems and mold bases that are part of the Milacron segment.
As we discussed last quarter, we started to see order trends improve in April and that trend continued for the rest of the quarter as hot runners recovered from weak markets and the shutdown in China earlier in the year.
Sales were down modestly year over year as automotive remained weak, but we saw growth and certain other end markets, including medical and electronics.
Overall orders were relatively flat year over year, but grew sequentially with strength in Asia.
As I mentioned as I mentioned last quarter. This part of our business historically responds quickly to the dynamics of the overall economy in particular end markets.
Now moving to aftermarket parts and service.
Aftermarket sales decreased 8% organically, which was just slightly softer than expected.
Demand for where parts was adversely affected by reduced customer production volumes and operating budgets.
Additionally, the pandemic limited the ability of our field service organization to travel to and access customer locations.
We expect the aftermarket business to pick up quickly when activity rebounds.
In the meantime.
We've adopted creative new approaches to deliver solutions for our customers critical service needs.
For example, we've successfully linked our home and office based engineers with our local field service teams at customer sites to deliver service directly.
Additionally, we're virtually consulting with customers on system set ups and problem solving.
Importantly, we're continuing to develop new approaches to stay connected with our customers and provide the service they need to support their operation.
We expect that many of these new approaches will be will become part of the way we do work going forward.
As mentioned Batesville experienced increased demand as result of the pandemic.
Sales remained high throughout the quarter, particularly in the areas that were heavily impacted by the mortality associated with the pandemic.
In addition to covert related volume Batesville made gains in some customer segments, we've historically underserved.
So in summary, our businesses performed well given the impact of cobot 19, and the associated market headwinds in the quarter, we remain confident in the strength and resilience of our portfolio. Both in the short term as we manage through the current environment and in the longer term as we move through the economic cycle.
We're focused on executing our strategy and positioning hillenbrand for long term profitable growth.
At this time I'll turn it over to Kristina to provide more specific details on our overall financial performance segment performance and the outlook.
Thanks, Joe and good morning, everyone.
Our team performed well with continued revenue growth and date fell and meaningful organic margin expansion across the portfolio.
We finished our third quarter with results that were better than we expected heading into the quarter given the uncertainty of the pandemic.
We delivered total revenue of $608 million, an increase of 36% primarily driven by the milacron acquisition.
Organically revenue decreased 6% or 5%, excluding the impact of foreign exchange.
Hey, Paul had a strong quarter and as expected the process equipment group and Milacron segment experienced a difficult backdrop as many industrial end markets already facing sluggish demand for further challenged by covered 19.
Adjusted EBITDA of $121 million increased 74%, primarily due to the milacron acquisition and strong Batesville performance.
Adjusted EBITDA margin increased 430 basis points.
Driven by Batesville and the process equipment group.
The actions, we've taken to contain costs and limit decremental margin have been highly effective across all segments.
Organically adjusted EBITDA increased 19% and adjusted EBITDA margin increased 410 basis points, despite lower volumes.
We reported GAAP net income of $24 million were 32 cents per share a decrease of 16 cents, primarily as a result of acquisition related expenses and increased interest expense.
Adjusted net income $61 million resulted in adjusted earnings per share of 81 cents.
An increase of 25% mainly driven by the addition of milacron and strong Batesville performance.
As a reminder, beginning with this quarter. We are now reporting adjusted earnings per share that excludes after tax amortization of acquired intangible assets.
We believe reporting adjusted Arctic earnings per share in net manner better reflect our core operating results and will provide greater consistency and transparency going forward.
For comparison purposes, applying the previous approach to the third quarter would have resulted in adjusted earnings per share of 65 cents.
Amortization expense was $16 million in the quarter and impact of 16 cents to earnings per share.
The adjusted effective tax rate for the quarter with 26.7% an increase of 10 basis points year over year.
Well in brand generated cash flow from operations of $75 million in the quarter, an increase of 19% compared to the prior year.
This increase was the result of cash generated by milacron improved profitability and a reduction in cash paid for taxes.
Capital expenditures were approximately $5 million in the quarter, and we returned $16 million to our shareholders in the form of cash dividend.
Moving to segment performance.
Batesville revenue of $140 million increased 7% year over year, mainly driven by higher volume as a result of increased daft associated with covered 19, partially offset by an estimated increased and the rate at which families opted for cremation.
Based on leverage the strength of its manufacturing and distribution footprint to respond efficiently to the elevated burial casket sales volume.
Facebook third quarter execution was outstanding and the benefits of the Hillenbrand operating model are evident in the results as we exceeded our expectations for profitability and cash generation.
Productivity initiatives and aggressive cost management, along with the increased operating leverage contributed to exceptional margin performance as adjusted EBITDA margin of 26% improved 670 basis point over the prior year.
Process equipment group revenue of $281 million decreased 11%.
Excluding the impact of foreign exchange revenue decreased 10%.
The revenue decline was driven by lower demand for capital equipment, and aftermarket parts and service across the segment.
Partially offset by favorable pricing.
Adjusted EBITDA margin of 20.5% was a record for the segment and increased 310 basis points.
With favorable mix productivity improvement short term cost containment actions and improved cost of quality.
We continue to see the benefits from our global procurement initiative and the deployment of the Hillenbrand operating model to drive continuous improvement across our operations globally.
Order backlog of $939 million remains strong at the end of the third quarter, it was down less than 1% year over year.
Excluding the impact of foreign exchange backlog increased 1%.
Sequentially backlog decreased 4% from the second quarter as a record high.
We continue to see solid demand in the pipeline for new products, New large project during the quarter.
Milacron revenue of $186 million decreased to 23% on a pro forma basis in comparison to the prior year before the acquisition and adjusting for this them coal divestiture.
Order backlog of $185 million decreased 3% compared to the prior year and 1% sequentially driven by a decrease in injection molding and extrusion equipment orders.
Sales remained weak for injection molding and extrusion equipment decreasing 37% year over year.
We experienced continued weakness in the global automotive market and the impact of covered 19 was the big factor in the quarter.
As Joe mentioned, India is an important market for this part of the business and we felt the effects of the country's broad based shutdown.
Not only where our operations limited, but we also had customer driven project delays given the extent of the disruption.
Offsetting the weak performance and injection molding the hot runner business experienced a rebound in China and strong growth in medical and electronics.
The strength in these areas could not fully offset the weakness in automotive and consumer goods market and hot runner sales were down modestly year over year in total.
Adjusted EBITDA of $38 million decreased 24%, but we were able to deliver adjusted EBITDA margin of 20.5%, which was only 20 basis points below the prior year through focused efforts on cost containment and productivity improvements.
This result speaks to the tremendous efforts of our team.
In addition to discretionary cost containment, we've taken swift action to mitigate the significant volume decline and the injection molding business by taking structural cost actions in the areas of site consolidation, eliminating a third staffed.
And initiating restructuring actions to rightsize the business.
Clearly, we need to see improvement in the market to return the business to the level of performance, we expect over the longer term.
However, we're focused on the things we can control to protect the profitability of the business.
Turning to the balance sheet net debt at the end of the quarter was $1.4 billion and the net debt to adjusted EBITDA ratio was 3.3 times.
As of the quarter end, we had liquidity of approximately $900 million, including $260 million and cash on hand, and the remainder available under our revolver.
During the quarter, we took proactive step to further strengthen our financial flexibility.
In May we amended our credit agreement to provide additional headroom under our leverage ratio covenant.
And in June.
We completed a 400 million dollar public debt offering due in 2025.
We used the proceeds to pay down our revolver balance in June and then use cash and the revolver to repay a $150 million of notes that were due in July.
We plan to use the remaining proceeds for general corporate purposes, including reducing leverage.
We do not have any other debt maturities until a calendar year 2022.
Turning to capital deployment, we continue to prioritize deleveraging and we're confident in our ability to return to a range more consistent with pre acquisition levels over time.
As we said previously the current economic uncertainty caused by the pandemic has shifted our expectations for the pace at which we expect to pay down debt, but has not changed our resolve to build on our successful track record of deleveraging following acquisitions.
Since we acquired Milacron, we've made good progress in reducing net leverage by half a turn.
Last quarter, we announced reduction of near term capital expenditures of approximately $40 million.
Importantly, we continue to make targeted strategic investments, while remaining mindful of the economic landscape.
Our investment focus has been on advancing product innovation digitalization and productivity.
We believe these investments are enabling profitable growth and will serve to position Hall hillenbrand, well when markets recover.
We expect to continue to return cash to shareholders in the form of quarterly dividend and do not anticipate any changes to our dividend policy.
Our share repurchase program remain suspended and we've curtailed acquisition activity, while we continue to integrate milacron.
We believe we've taken appropriate actions to mitigate the financial impact of the pandemic without compromising our ability to capitalize on opportunities when the global economy recovers.
As Joe mentioned earlier, our teams are working hard on critical business areas.
I'd like to highlight three major initiatives.
First is cost containment.
Last quarter, we identified an additional $25 million of near term cost savings. In addition to the milacron synergy target this year.
While several measures we've taken our temporary we estimate that we can retain about half of these incremental annual saving on a permanent basis.
We expect these actions to reduce potential decremental margins and a scenario, where we experienced further pressure on demand.
Second as working capital improvement, we continue to look at all aspects of working capital, including expanding our successful supply chain financing program across the company and continuing to aggressively manage an optimized inventory levels.
We see considerable opportunity to deploy sustainable processes within milacron specifically.
Third as supply chain optimization.
As you heard from Joe we are increasing our three year target for synergies by $25 million.
Optimizing supply chain is the biggest driver of that increase.
We recently created an enterprise wide global supply management Center of excellence and brought on a new leader with a proven track record of success.
The focus will be on developing global supply management and procurement strategies.
Executing our synergies and driving accountability for the enterprise.
We believe these efforts will support profitability improvements and further strengthen free cash flow generation.
Let me conclude my prepared remarks, with our near term outlook.
We are providing guidance at a high level for the fourth quarter with the assumption that we'll continue to seek gradual stabilization of the global economy without any new broad based cobot related shutdown or disruption.
First let me provide some insight into what we saw in our businesses in July.
In the process equipment group, we saw sequential improvement in two key areas in July as large plastics projects and aftermarket parts and service gained momentum.
We booked more than $100 million in large scale plastics projects since the end of the quarter, mainly for polyolefin and engineered plastics production.
At the same time customer requested project delays continue to be a challenge given persistent uncertainty around covered 19.
Mid cycle capital equipment continued to face sluggish demand.
Overall, we expect segment revenue to be modestly higher sequentially in the fourth quarter.
Following record EBITDA margin in the third quarter, we expect modestly lower margins sequentially as we are making targeted investments to capture growth and given a less favorable product mix.
Milacron had an encouraging start to the quarter in July as hot runner sales improved sequentially.
We expect that to moderate over the quarter as we don't anticipate recent strength and coven 19 related medical sales will continue at the same pace.
Additionally, hot runner sales have been seasonally stronger and our fiscal third quarter historically.
On the injection molding side sales remained weak in July and we expect that to continue through the fourth quarter.
Overall on a sequential basis, we forecast milacron revenue to be down slightly and we expect fourth quarter EBITDA margin to be lower due to mix impact from lower hardware sales, which typically carry a higher margin.
They fill volumes remained higher in July in certain geographic regions experiencing more severe effects from the pandemic.
We expect volumes to moderate during the fourth quarter and return to a more normal trend as mortality associated with coven 19 diminishes.
In total were forecasting batesville revenue to decrease modestly from third quarter to fourth quarter, and we project adjusted EBITDA margin for the full fiscal year to be in the range of 22% to 22.5%, which is higher than our previous guidance.
Importantly, we expect Batesville will continue to provide an important offset to cyclical pressures facing the process equipment group and milacron.
On a consolidated basis, we expect hillenbrand revenue to be relatively flat in the fourth quarter on a sequential basis.
Adjusted EPS is forecasted to be in the range of 60 to 70 cents for the fourth quarter.
We expect the decrease from a third quarter will be driven impart by lower base, all sales, which would also have an adverse mix effect on overall margin.
Additionally, we plan to ramp up strategic investments in the business and we expect interest expense to increase sequentially.
Our expectations for other key metrics are shown on slide 14.
We recognize that there is still a high degree of volatility and uncertainty around the world, having said that our team has demonstrated the ability to execute through challenging circumstances I have confidence in our ability to achieve these results and finished the year on a positive now.
And now I'll turn the call back over to Joe.
Thanks Kristina.
The management team remains focused on or near term priorities of running our business is well integrating milacron with excellence in generating strong cash flow to pay down debt.
We've taken decisive actions to weather the challenges brought on by Cobot 19.
And a position hillenbrand's to capture growth and continued profitability as conditions improve.
We continue to deploy the hillenbrand operating model to manage the business in a challenging demand environment.
And we're being mindful of both the short and long term implications of the actions, we're taking in our businesses.
With that let me end this part of the call with a few key takeaways before we open the line for your questions.
First we delivered strong quarterly performance in the faces a very challenging environments.
Basal delivered a great quarter at both the top and bottom line process equipment group recorded record EBITDA margins and maintained a strong backlog as we move into the fourth quarter.
And within the Milacron segment, we held EBITDA margins on a year over year basis.
In addition, we saw sequential growth in the hot runner business.
That was offset by continued weakness in injection molding business. However, we see opportunities to improve margins in this business as markets recover.
Second the Milacron integration is on track and we remain bullish on the long term strategic and financial benefits to the deal.
In addition, we're executing on our initiatives to capture synergies driving cost savings at an accelerated pace and increasing our three year synergy target by 50%.
Third we believe we're in a solid in a solid financial position following our successful debt offering and strong cash flow in the quarter.
And finally, we're committed to executing our long term profitable growth strategy as we focused on strengthening and building our larger platforms and divesting several smaller businesses to drive increased shareholder value.
With that we'll open the line for your questions.
At this time, if you would like to ask a question. Please press Star then the number one on your telephone keypad.
And that is stored in the number one and we'll pause for just a moment to compile the Q1 day roster.
Your first question is from Daniel Moore with CJS Securities.
Joe Kristina good morning.
Good morning, Good morning, Dan.
And congratulations on not what I would describe is very strong operating performance and vindicating results really difficult environment from the start with Hegh.
Margins were exceptional there this quarter, obviously tick a little lower in Q4, but maybe talk about the sustainability of those levels.
That relates to peg.
You know we have made really good improvements in that business from emerging perspective, we've had our global procurement initiative that has been driving margin expansion.
Improved cost of quality and that segment, when we think about next quarter.
As you know uhm.
We were slightly down an aftermarket sales this quarter, we expect that to rebound slightly.
So we should see some margin expansion, there, but that will be off that frankly by the large projects because we expect to see more large projects and the fourth quarter.
And and so I don't expect.
The the margin to hold where it is we will also start to be making some <unk>.
Strategic investments in the quarter and the fourth quarter I still do believe that the margin expansion will be strong.
In the process equipment group.
And proud of the teams efforts, but I don't expect it to be at the levels that it will be this quarter.
[noise] helpful. I appreciate it and then switching gears to milacron, giving old restructuring your efforts.
Remind us what should incremental martita look like any change for the hot runners are still the highest generally high levels and you know an injection molding when demand.
<unk> returned for those two and markets.
Yeah. So I think as as you know our hot run a business has very strong margin and as we think about the improvements in the organization, particularly the synergies.
We would expect most of that margin improvement.
To impact not only injection molding, but also some of our.
Equipment group businesses as well and so we do expect obviously.
Incremental margins from this quarter.
I think we just need to wait and see what happens volume plays a very key.
Element and leverage and margin expansion, but we do expect.
We have taken also structural cost actions in that business. So.
From the beginning of the year, we've reduced about eight 8% of the head count and uhm and that business and so I think we're positioning ourselves well for the future.
And you know we are reducing the detrimental margin because of those actions that we've been taking.
No doubt, maybe one or two more.
The decision on Terra sources flow control you know obviously.
<unk> helps you focus on your core business and simplify story, but you mentioned that processes has begun or your preparation any comment there I know we're in the middle of a pandemic.
What kind of timeframe.
Do you think is reasonable to the corners or years and just to remind us. So she could this or current run right EBITDA and revenue for those businesses.
Yeah, Hi, Dan. Thanks for the question Yeah, I think as you mentioned, we feel like.
Existing those businesses is really well aligned with our strategy.
Talk to the last you're a few quarters, especially about.
No increasing our investments and directing our investments towards the larger platforms. When we think we get better return. So so again we felt.
It made sense to exit those businesses.
Regarding timing.
We're we're just beginning to prepare the businesses for sale and so.
And we're cognizant of the overall macro environment. So really our goal is to is to move as quickly as as is prudent and and execute quickly and again start now so that as the environment improves we're in we're well positioned for those.
Processes.
And.
Generally those businesses are probably the relatively small business is probably about just think around 5% of hillenbrand's overall revenue.
And from a margin perspective kind of businesses that are in line overall with I would say the overall process equipment group.
Margin levels.
From that from that perspective so.
We think that's provide some clarity related to the portfolio again, the relatively small businesses, particularly with the acquisition milacron and we feel that this this decision.
Good businesses, but it's really it's a strategic decision and.
Feel like you know lines really well with our our.
Our strategy of directing investment towards the larger platforms.
Yeah.
Last one it'll jump out of similar lines.
Assuming we divest flow control Pterosaurs wholesales, Tim cool.
Let me just talk about the revenue synergy between the remaining businesses.
Plastics polyolefin.
No maybe when we come out a pandemic.
We talked a lot about the cost synergies but.
Type of incremental topline growth and we're having a these businesses really fit together if you could just give us a little color on that would be appreciated. Thank you.
Yeah. Thanks, Dan.
So first of all I would just say you're exactly right. When we were very focused on the deal to drive the kind of opportunities that we had more certainty in which of course are the cost synergy. So we're really on very focused on driving the cost synergies I think coven 19 also had a bit of an impact on our progress toward.
The revenue synergies as the teams were really adjusting to what happened during the past quarter I think we've got our feet under if now in terms of what's happening in the marketplace and so there are a couple of areas, where we see opportunity.
We have really strong positions across the plastic value chain. So we have a couple of key areas as an example.
Extruder in.
In plastics production is just like a key piece of equipment and then we've demonstrated we could sell around that.
Integrate other products.
Build systems around that key pieces of equipment. It's the same idea with with injection molding.
Hot runner.
Business. These are key pieces of technology, where we can continue to add.
On.
And cross sell product lines as an example material handling products in injection molding space is a good example.
I think the other thing is is it enhances our product lines and so would expand some of our product lines as an example.
Milacron makes extruders they tend to be smaller extruders.
Those smaller stores were better position us in some key and markets, where where we tend to just play at the very larger projects, we will be able to play and more more broadly.
And so there we see an opportunity as well.
I think over the over the long run we see the opportunities to share R&D and technology.
Especially as.
The world moves to more <unk>.
Recycle content and plastics and understanding how the materials behave all the way from.
Engineered plastics through the hot runner into the final product in a mould.
We think that there'll be benefit to us as as recycling more use a recycling materials biodegradable materials start to come into play so.
Or a few areas and as as we said and the prepared remarks, we've got the teams kicked off working on those opportunities I don't want to speculate on the size.
Those opportunities right now we're still early.
We do see opportunity to cross sell products expand our current offerings.
And then to share technology to really.
Developed great solutions for some emerging markets as I mentioned like like recycling biodegradable plastics and those kinds of things.
That's really helpful jaw will jump back with any follow ups. Thank you.
Thanks, Dan.
Your next question is from Matt Somerville with da Davidson.
Thanks, a couple questions first can you may be quantified accumulative impact of the shutdowns in India from the physical second quarter and fiscal third quarter in terms of what that's meant for revenue and earnings for the company.
Sure. So when we think about.
Really from India. The second quarter was not didn't have really a significant impact, but we saw steep decline in the third quarter and so when we generally think about India as it relates to.
Injection molding it is about 20% of the revenue of that business and so.
Did see a decline and it was essentially shut down in April and May and June we started to see that come back so I would say that.
Generally it had roughly.
10 to 15 million dollar revenue impact on the business between just the lack of shipping as well as some of the customer delay decision delays that we saw.
In the corner.
Does that answer your question sorry.
Yeah no.
And then maybe you can you talk about.
From a cost synergy standpoint, what you realized thus far year to date and what a sort of if you look forward over the next couple of years as you build to that 75, what's at cadence looks like year by year.
Yeah sure so.
Year to date, we have approximately $16 million of course synergies.
And as we said, we expect to get 20 to 25 million in year and so as you know we've take we took really swift action at the beginning of the acquisition and so.
We're saying really good progress there as we think about the next couple of years I would say that.
You could probably expect next year are similar number to this year. So this year in your savings. We would have 20 to 25 next year. We would have 20 to 25 and you can probably think about that as.
The.
Impact year by year, and I would just say the increase as I mentioned in my prepared remarks is really coming from primarily from procurement.
As I mentioned, we had we have hired a new procurement later and.
He does have a proven track record of success. So we are highly confidence in the revised synergy synergy target.
And then just as the last question can maybe talk about what a realistic free cash flow target might look like for hillenbrand in fiscal 20, and then remind us how much one time.
Sort of stuff around the acquisition effectively goes away next year's we start to bridge up to a physical 21 cash flow.
Sure. So we are at approximately on a year to date basis about $100 million of of free cash flow, we expect our fourth quarter obviously.
To continue to generate free cash flow.
Likely not as high as this quarter, primarily because we did benefits from some deferred taxes.
Which will not repeat next quarter, but we expect to have nice free cash flow in the fourth quarter.
As it relates to the one time items I would say, we had roughly $60 million to $70 million of one time items that hit us from a cash flow perspective, obviously, we will still be integrating the business and we will still have some.
One time expenses, if you will associated with that integration so.
It's not fully going to be offset but I would say the majority of that amount is going to be offset going into next year. So.
I'm confident in our ability to generate free cash flow.
I think the other thing that we have that we've been working on his or we will be working on it now and as we continue to go through the year is working capital improvement. So we should also see some benefit there as well.
Great. Thank you.
Your next question is from John France.
Sidoti Company.
Good morning, Jerome Christina.
I'd like to switch over to Batesville for a second.
So if I heard you correctly, you said that mixed benefited.
Segments, and the quarter circle, and the June quarter, yet sort of expected revenues mix was down why the change.
Yeah, No I, if I said that I must have misspoken no mix was not really a benefit in the quarter.
Think we saw similar trend although.
It is somewhat we saw kind of our traditional I would say our traditional mixdown that we expect an an industry wide basis.
I think as we discussed and the last quarter.
Pandemic times, especially when there's limited funeral services in some cases because of gathering and social.
Reduce gathering and social distancing, we didn't see a decline in.
[noise] decline and mix I think we've seen that come back and that has improved but but generally mix was was unfavorable volume was favorable mix was was generally unfavourable a little bit more than normal in the quarter, but an improvement sequentially I think from last quarter.
I, probably misheard Jordan misspoke, Okay that makes sense then.
Okay.
Guidance for the fourth quarter.
Are you assuming.
About Saint 22 cents of <unk>.
Harmonization expense on the EPS number.
Roughly so we had about 16 16 cents that's quarter and we expect that to be similar next quarter's how about 16 cents.
Okay.
And lastly on the rationalization of the supply chain what was it that you realize that you could increase the.
Of course savings by 50% that.
Wasn't there.
Six months ago.
Yeah. So you know as you know we have been.
We've had the the.
The company's combined now for about eight eight or nine months and so.
I think last quarter, obviously, we were focused on making sure just given the pandemic, making sure that our supply chain was operating efficiently I think one of the key elements that gives me a high level of confidence as we did bring on this new leader of.
Global supply management and he has how to track record of success and so as he has been onboard he has created teams.
Essentially commodity teams to go and identify cost savings and so they have identified incremental cost savings the team and so it gives me a high level of confidence and so.
That is really the main reason that.
The timing is now.
Okay. Thank you very much because I'll get back that's cute.
Okay. Thank you John.
Your next question is from Daniel more with Cja Securities.
Thank you again, just the heartburn or business, obviously saw some sequential improvement through the quarter.
Two Christina can you just remind me what you said it up trends in July and just more generally what are you hearing from your.
Customers of your customers customers that'd be across and markets around any pick up and activity outlook et cetera.
On that specific piece of the milacron business. Thanks.
Yeah, Dennis is Joe.
So in the quarter, we saw continued strengthen Asia.
The economy's, they're particularly China came back so.
That was that was a bright spot and I would say the other the other two and markets, where we saw some strength.
Well first we saw continued weakness and automotive in that businesses with our other businesses on the flip side of that we did see strength in medical products.
Is is capacities of increased around the globe for medical products.
And then electronics as well so we saw a nice order pattern for electronics during the during the third quarter as we move into July we're continuing to see some of those same trends.
Where we've seen good order patterns in Asia, a little bit softer in.
In India in Europe, and some and a little bit of strength again and medical.
America so.
We're seeing pretty solid demand for the hot runner business as we move.
<unk> gone through July.
Just a reminder, I mean, this was a pretty short cycle business and so.
It's hard to see too far out.
And it moves pretty quickly with the the global through the economy in certain and markets, but but in July decent orders in July.
That's helpful and India on the injection molding side.
Up and running in Jean.
To what level of capacity sorta pre told it and did you say we are in India at this point.
Yeah. So we've had some ups and downs in India, I would say that we were pretty close down as was the rest of a large part of the country.
In the quarter during the quarter so.
A pretty tough quarter from both in order in delivery as well as an operational standpoint now the good news is it hasn't really impacted R. North American business as we've had enough capacity for some of the subassemblies and components that we would shipped to the U S.
For that business we have.
We've gone if we went back up so we're obviously we were probably at 75% capacity.
During the month of June it's come back down to probably 60 or 65% capacity as the as the the pandemic is kind of.
Gone up and down a little bit where we have our production and I would say as of last week, we were in that 60% to 65% of capacity range now that's from an operational standpoint, we still are able to work from home from an engineering perspective et cetera as.
People are are able to work from their homes and continued to do some of the office work.
At a higher level than than the operations.
Perfect and last one rearview mirror question, but as we looked at a physical 21 for modeling purposes, just to remind us Christina how much if you have it there how much revenue and adjusted EBITDA.
Contribution we'd see you saw in fiscal 20th from Sin cool.
From him call.
Yeah, I'll, let me.
Offline that.
That's fine, but I just want to make sure. If people are modeling properly you want to go forward basis.
Yeah, you know what Dan just give me one second I don't have that at the at the tip of my finger.
Not a problem.
Cover cover my follow up so thank you for all the color.
Well, let's see we might so in the year.
Had roughly $38 million of revenue and about 75 million of EBITDA.
Perfect. Okay. Thanks again.
Thank you thanks, Dan.
There are no further questions at this time.
Alright, Thank you operator, and thanks to everyone for joining us today.
We look forward to talking with you again, when we report or fourth quarter and full year results in November.
Have a great day and stay safe everyone.
Ladies and gentlemen, this does conclude today's conference call. Thank you for participating you may know disconnect.
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