Q1 2021 Hillenbrand Inc Earnings Call
[music].
Greetings and welcome to the Hillenbrand Q1 fiscal year 'twenty 'twenty one earnings call.
At this time all participants are in a listen only mode of.
A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host Causeway back theory Senior director of Investor Relations. Please go ahead.
Thank you good morning, everyone and welcome to Hillenbrand's first quarter fiscal 2021 conference call on <unk>.
And by our President and CEO, Joe Raver, and our senior Vice President and CFO Kristina Cerniglia.
And I want to direct your attention to the supplemental slides posted on our IR website that will be referenced on today's call.
Turning to slide three a friendly reminder, that our comments may contain certain forward looking statements that are subject to the safe Harbor provisions of the securities laws. These statements are not guarantees of future performance and our actual results could differ materially also during the course of this call we will be discussing certain non-GAAP operating performance measures Inc.
Pro forma comparisons for our business.
I encourage you to review slide three of the presentation and our 10-Q, which can be found on our website 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 Joe.
Thank you <unk> and good morning, everyone.
Thanks for joining us today, and we hope you and your families are safe and well.
I'd like to begin by acknowledging the continued dedication of hillenbrand as employees and managing the business through the COVID-19 pandemic.
We remain vigilant and 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 now and into the future.
This past quarter, we marked the one year anniversary of the close of the Milacron acquisition over.
Over the past year, our teams have made rapid progress integrating the business and capturing synergies.
We also continue to adapt successfully to the challenges brought about by COVID-19.
We ended fiscal year, 2020, and a strong position and and the first quarter of fiscal 2021 continued to build on that momentum delivering strong results.
Each segment exceeded our top line expectations and Batesville and the molding technology solutions segment also achieved meaningful margin expansion by driving the benefit of higher volume for the bottom line.
In addition to our solid operating performance and the quarter, we made significant progress against our previously announced plan to exit the flow control businesses Red valve and Abel and we remain on track with our plan to divest the tariff source global overall I am pleased with our execution and the first quarter.
And while uncertainty regarding the pandemic remains we are focused on navigating the environment to drive profitable growth and our large platform businesses capture the full benefits of the milacron acquisition and strategically deploy cash flow to drive long term shareholder value.
Before I get into the highlights of the quarter, Let me spend just a few minutes on the execution of our strategy as outlined on slide five.
As we've consistently communicated we're focused on executing for key strategic pillars, as we work to build hillenbrand into a world class Global Industrial company.
The first is the strength and build business platforms, both organically and through M&A the.
And the Milacron acquisition represented a major step and the execution of the strategic pillar with Milacron, we added industry, leading and complementary hot runner and injection molding product lines to the hillenbrand portfolio further strengthening our customer offering increasing our global scale and enhancing our.
These across the entire plastics value chain from base resin production all the way through recycling.
Given that we have materially improved our balance sheet over the past year, we expect to continue to increase growth investments, both organically and inorganically with the focus on strengthening and building, our large business platforms and Aps and the MTS.
Our second strategic pillar is to manage the batesville for cash Batesville has a long history of manufacturing excellence and burial caskets with solid and predictable cash flow that we can invest to grow our industrial platforms.
The outstanding cash flow over the past several quarters, which we used to pay down debt underscores the important role of Batesville plays and our portfolio.
The third pillar of our strategy is to build a scalable foundation for growth using the hillenbrand operating model and.
The acquisition of Milacron is providing a unique opportunity for us to transform and scale. Many of our shared back office functional business processes and areas such as it HR.
H, our health and welfare benefits and finance.
We believe that our efforts the standardized processes and services and the leverage best practices across our operating companies globally will drive meaningful efficiencies improve effectiveness and quality and provide a scalable foundation for future growth.
We're also driving efficiencies and best practices and operations by leveraging our combined spend through the global supply management group and driving lean business practices, which really are at the core of the hillenbrand operating model to improve safety quality delivery cost and working capital.
Our fourth and final pillar is to effectively deploy strong free cash flow.
We have a track record of maintaining a flexible balance sheet. So we can grow through strategic acquisitions, and a history of quickly reducing leverage following acquisitions.
And this past quarter, we reduced our leverage ratio ratio by approximately one half turn to two two times net debt to EBITDA.
We are confident and our ability to continue to generate robust free cash flow and maintain a strong balance sheet and grow our company, both organically and inorganically, while returning capital to shareholders.
Today, given our current leverage.
We are lifting the temporary suspension of our share repurchase program and we will resume consideration of strategic bolt on acquisitions and.
As always we will remain disciplined and our approach to deploying cash.
Now, let me turn to some highlights for the quarter.
Total company performance exceeded our expectations.
Led by higher burial casket demand at Batesville associated with the COVID-19, pandemic and strong hot runner systems growth and the MTS segment, driven by medical and packaging demand. Additionally.
Additionally, we drove productivity and synergies across all of our segments.
The 30% growth at Batesville, and the quarter was well above our expectations.
While this significant increase and burial casket demand is both unfortunate and unprecedented we were well positioned to handle this increase in volume at Batesville.
And the results for the quarter reflect that.
Over the past few years. The team has made significant progress and simplifying operations, reducing cost and improving the supply chain and that was evident and the way Batesville responded to the spike in demand and drove the benefits of operating leverage to the bottom line.
Before I move to the other segments I would like to take a moment to express my sincere. Thanks to our funeral home customers and their staff, who have worked tirelessly and heroically to serve their communities. During this terrible pandemic.
And I'd also like to think of the Batesville employees, who have worked incredibly hard and who have made personal sacrifices to deliver on our commitments to our customers.
The mental and physical challenges associated with the pandemic over the past year have been significant and I continue to be proud of the batesville team for their resilience and their ability to execute at a high level and such and demanding environment.
This is the company that is truly living its mission of helping families honor the lives of those they love.
And the advanced process solution segment sales came in higher than we expected when we spoke to you last quarter.
This is despite lower year over year revenue due to continued delays on specific large polyolefin projects and our backlog.
The large project delays and the quarter were partly offset by faster delivery for smaller and mid size of equipment.
We have had no cancellations of large projects from our backlog and demand for this type of project continues to be strong overall, particularly in China, which is offsetting lower north American demand for large polyolefin projects.
The strength, we saw in the food and pharmaceutical end markets at the end of fiscal 2020 continued into the first quarter of this year.
Other industrial end markets continue to remain challenged.
And molding technology solutions sales and margins were strong with hot runner systems sales up and all regions and injection molding strength and India.
We saw an uptick in several end markets, including medical packaging consumer goods and electronics.
Sales within the automotive were up modestly sequentially, but continued to be soft compared to historical levels.
Parts and service revenues were lower compared to the prior year.
Our MTS backlog increased 100% year over year on a pro forma basis.
And primarily by continued strength in orders for injection molding equipment.
Total company backlog increased over 32% year over year on a pro forma basis to a new record of $1 $4 billion.
The real sign of continued strong demand for our highly engineered solutions and applications expertise.
We continue to take the appropriate steps to convert our backlog to revenue while following all necessary COVID-19 safety protocols and managing customer induced schedule changes.
Overall, I believe we executed well on the quarter and the businesses are well positioned for the future.
Before I turn the call over to Christina for additional detail on the quarter I want to spend a few minutes to discuss our sustainability efforts.
And some of you may have seen and our recently released annual report.
Sustainability is an important topic and one that we've been working on for a number of years at hillenbrand.
And 2018, we took a big step forward and our efforts by forming a cross functional sustainability steering committee, that's been effective and guiding our actions and a more coordinated way across the entire enterprise.
And 2019, we conduct conducted of materiality assessment to identify the sustainability related topics, most important to our stakeholders, including employees customers and investors.
And that same year, we also signed onto the United Nations Global compact because we believe that incorporating sustainability and our business activities will improve all aspects of our company and.
Including the impact we have on society and the environment.
And in the summer of 2020, we issued our first sustainability report, which share some of the activities that we've undertaken.
One, particularly impactful program as our global community engagement initiative that we call the one campaign and.
And the past years, the hillenbrand and one campaign is focused on the UN sustainable development goals for <unk>.
Of quality education.
The reduced in the qualities with the focus on diversity and inclusion and responsible consumption and production.
Leveraging the results of our recent materiality assessment has been instrumental and identifying the STG is most important to our stakeholders and and focusing our efforts and areas that can have the greatest impact to our company and society.
In 2021, the one campaign is focused on the STG, good health and well being and fact currently a number of a number of our employees are volunteering to support of vaccination clinic and our local Batesville community.
Given the impact of the COVID-19, pandemic and the communities and which we operate and across the nation and World. This is an initiative, we feel strongly about lending our time and talents to.
So with that I'll turn the call over to Kristina to provide more specific details on our overall financial performance segment performance and outlook.
Thanks, Joe and good morning, everyone throughout my section and I'll be referencing pro forma results, which exclude red valve and the Aps segment and the simple business, which was divested on March 30th 'twenty and 'twenty and the MTS segment.
It also assumes the milacron acquisition closed on October 1st 2019.
We believe these pro forma results provide a better comparison of our ongoing operations and you will find the comparison of as reported and pro forma results on slide 19 of the earnings slide deck.
Turning to the quarter our teams sustained their strong momentum with continued revenue growth significant margin expansion and solid free cash flow.
We finished the quarter with the results that were better than we anticipated, particularly given uncertainties caused by the pandemic.
We delivered total revenue of $693 million and increase of 22%.
Excluding the impact of foreign exchange and total revenue increased 19%.
On a pro forma basis revenue increased 6% driven by strong burial casket demand at Batesville and hot runner systems sales and MTF.
Adjusted EBITDA of $138 million increased 50% and adjusted EBITDA margin of 19, 9% increased 370 basis points.
On a pro forma basis, adjusted EBITDA of $137 million increased 51% and adjusted EBITDA margin was 20%.
With the benefit of additional volume along with the actions we've taken to contain cost across all segments. We expanded our adjusted EBITDA margins 600 basis points over the prior year on a pro forma basis.
We reported GAAP net income of $76 million or dollar one per share and increase of $1 six over prior year, primarily driven by a decrease and acquisition and integration costs related to the milacron the gain on the sale of Red valve.
And higher volume within Batesville.
Adjusted net income of $72 million resulted in adjusted earnings per share of 96.
And increase of 28%, mainly driven by strong Batesville and M. T S performance.
The adjusted effective tax rate for the quarter was 28, 5% and increase of 650 basis points from the prior year.
The increase is primarily due to the prior year tax benefit recognized for the reduction and India's statutory tax rate and an increase and the deferred taxes associated with foreign unremitted earnings this quarter.
Hillenbrand generated cash flow from operations of $66 million and increase of $48 million compared to the prior year.
This increase was primarily due to lower acquisition and integration costs associated with the milacron and the strong cash generated by MTS from advanced payments on the strong orders.
Capital expenditures were approximately $6 million and the quarter slightly lower than anticipated.
We also paid down $157 million of debt and returned $16 million to our shareholders and the form of cash dividends.
We recognized $6 million of incremental synergies and the quarter and we expect to deliver $20 million to $25 million of synergies this year.
We remain on track to achieve the three year $75 million total run rate synergies related to the milacron acquisition.
Moving to segment performance Batesville revenue of $165 million increased 30% year over year, driven by higher volume as a result of increased deaths associated with COVID-19, and higher average selling price.
Offset by an estimated increase and the rate at which families opted for cremation.
With the commitment of our Batesville employees, our manufacturing capabilities and distribution footprint, we were able to respond to the elevated volume to meet our customers' needs.
Batesville is first quarter execution was outstanding and the benefits of the Hillenbrand operating model are evident and the results.
Strong operating leverage and productivity initiatives contributed to exceptional margin performance.
Adjusted EBITDA margin of 31, 7% improved 1000, and 360 basis points over the prior year and more than offset inflation and the quarter.
Turning to advanced process solutions.
The P S revenue of $291 million decreased 5%.
On a pro forma basis revenue of $283 million also decreased 5%.
Excluding the impact of currency revenue decreased to 9%.
The revenue decline was primarily driven by a decrease and large polyolefin system sales due to customer driven delays on certain projects and.
And lower parts and service revenue driven by delays associated with the COVID-19 pandemic.
We continue to see field service and aftermarket softness exacerbated by COVID-19 travel restrictions, but the aftermarket business has begun to establish stabilized and we've continued to innovate to provide service remotely.
Longer term, we continue to see opportunity for growth and this area of the installed base for our large systems continues to grow.
Adjusted EBITDA margin of 16, 7% was down 10 basis points and down 30 basis points on a pro forma basis.
The decrease was due to lower volume and adverse mix from a couple of lower margin strategically important plastics projects, partly offset by cost containment actions and productivity improvements.
What are the backlog, excluding red valve reached a new record high of $1.1 billion at the end of the first quarter and increase of 21% year over year on a pro forma basis.
Excluding the impact of foreign currency exchange backlog increased 12%.
Sequentially backlog increased 10% on a pro forma basis from the previous record high.
We continue to see solid demand and the pipeline for new large plastics projects during the quarter primarily from Asia.
These projects are expected to contribute to revenue over the next several quarters, including about 28% of the backlog expected to convert to revenue beyond the next 12 months.
MTS revenue of $237 million increased 78% and 7% on a pro forma basis and comparison to the prior year.
Excluding the impact of foreign exchange revenue increased 5%.
Sales of Hot runner systems increased double digits on continued solid demand and medical and packaging and markets and sales of injection molding and extrusion equipment were roughly flat year over year.
But improved 20% on a sequential basis.
India in particular continues to rebound on strong demand across all end markets, particularly medical and consumer goods.
Adjusted EBITDA of $48 million increased 84% and 47% on a pro forma basis with adjusted EBITDA margin of 24%, increasing 560 basis points compared to the prior year on a pro forma basis.
The improvement was driven by higher volume productivity initiatives, including cost synergies and favorable mix of higher margin Hot runner systems.
We're encouraged with these results and remain focused on leveraging the hillenbrand operating model to drive sustainable operational improvements.
Order backlog of $292 million increased 100% compared to the prior year on a pro forma basis and 20% sequentially.
Merrily, driven by an increase and injection molding equipment orders.
Activity was strongest in the medical and consumer goods packaging and electronics end markets.
We saw a slight uptick and automotive orders and the quarter and remain cautiously optimistic about future demand.
Turning to the balance sheet net debt at the end of the quarter was $1 $1 billion and the net debt to adjusted EBITDA ratio fell by a half a turn sequentially to 2.2 times.
As of the quarter, and we had liquidity of approximately $1.1 billion, including $266 million and cash on hand, and the remainder available under our revolver.
In the quarter cash proceeds from the sale of Red valve were $59 million.
We paid down $157 million of debt, including prepayment of our term loan due in 'twenty and 'twenty, two with cash on hand, and revolver Bauer borrowings.
We have no near term debt maturities and we will continue to leverage the hillenbrand operating model to drive greater efficiency across the business.
We continue to focus our efforts on improving working capital efficiencies, particularly and the M. T S segment.
Turning to capital deployment, we are pleased with our aggressive deleveraging progress, which gives the company greater flexibility to grow both organically and inorganically.
While our focus will still be to pay down debt. We are now more comfortably within our leverage guardrails.
We will continue to focus on reinvesting in the business with strategic investments and high return opportunities and as Joe mentioned earlier, we will reinstate our share repurchase program as well as begin to consider strategic bolt on acquisitions.
Let me conclude my prepared remarks, with our near term outlook, which includes Abel.
Amid continued uncertainty we are providing guidance only for the second quarter of fiscal 2021 under the assumption that we will continue to see gradual stability and the global economy without any new broad based COVID-19 related disruptions.
We expect hillenbrand total second quarter revenue to increase the year over year, and a range of 12% to 16%.
We expect adjusted EBITDA and the range of $126 million to $137 million and adjusted earnings per share and the range of 85 to 95 for the second quarter and increase of 29% on a year over year basis at the midpoint of the range.
Starting with Batesville and the second quarter, we expect revenue to increase 20% to 25% year over year based on a continued trend of elevated burial casket volumes due to the pandemic.
We expect strong margin performance and the second quarter, driven by operating leverage and continued efforts to drive productivity.
However, we are experiencing higher commodity inflation and transportation cost, including premiums paid to expedite shipments.
We're targeting adjusted EBITDA margin of 29% to 30% and increase of 590 to 690 basis points over the prior year.
And advanced process solutions, which includes mid and long cycle capital systems equipment, and aftermarket parts and service, we expect second quarter revenue and a range of flat to down 4% year over year, primarily due to customer driven delays with the timing of long cycle.
The large polyolefin projects.
Partly offsetting that is the demand momentum, we have seen and a couple of areas for our mid cycle capital equipment within the plastics, and food and markets and stabilization and parts and service.
We expect adjusted EBITDA margin of 17.5% to 18% to be modestly lower from a year over year perspective down 60 to 110 basis points as the headwind from lower volume project mix and certain targeted investments is partially offset by our continued cost.
<unk> and productivity initiatives.
Turning to molding technology solutions, which includes mid cycle injection molding equipment short cycle of hot runner systems, and aftermarket parts and service.
We expect strong second quarter revenue growth and a range of 37% to 40% over prior year and.
The demand continues to be strong and both hot runner and injection molding product lines.
Last year, we had COVID-19 related shutdowns in China that we do not expect will repeat.
We are targeting adjusted EBITDA margin of 18.8 to 19, 2% and improvement of about 320 to 360 basis points as the benefit of higher volume and continued productivity improvements flow to the bottom line.
On a sequential basis margins will be lower than the first quarter due to a mix impact from higher injection molding sales, which typically carry a lower margin.
Higher commodity inflation and transportation costs and targeted investments, we are making to drive growth.
Now turning to our expectations for the full year.
In terms of the outlook for the Batesville segment and the second half we are not providing specific guidance given the uncertainty that remains due to the pandemic.
The impact of the newly identified strains of the Corona virus and the speed and effectiveness of the vaccination rollout continued to make longer term demand for batesville hard to predict.
And the second half of the year, we expect batesville revenue and margins to be lower on a year over year basis, due primarily to the impact of lower volume from fewer COVID-19 related deaths, along with higher commodity inflation.
And the advanced process solutions segment, we are expecting revenue to increase low single digits on a pro forma basis for the full year.
We expect increased revenue and large plastics projects and stabilization of the aftermarket business during the second half of the fiscal year.
We also expect EBITDA margins to be slightly down year over year on a pro forma basis due to unfavorable project mix and investments and the business.
Turning to the molding technologies segment for the year, we expect revenue to increase and the mid teens year over year on a pro forma basis, driven by continued strength and end markets, such as medical packaging and consumer goods and gradual improvement of automotive.
We expect moderate EBITDA margin improvement year over year on a full year basis as additional volume leverage and productivity are partially offset by unfavorable mix and inflation.
We expect pressure on margins and the second half of the fiscal year versus prior year due to unfavorable injection molding mix and additional investments and the business.
Overall for the portfolio, 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, and I have confidence and our ability to achieve these results and continue our momentum.
And now I'll turn the call back over to Joe.
Thanks, Kristina let.
Let me leave you with a few final takeaways before we open the call for your questions.
We executed well and delivered strong performance across the board and the quarter and particular, we achieved robust growth at Batesville and exceptional EBITDA margin and Batesville and MTS.
The acquired Milacron businesses are beginning to accelerate their performance and we remain bullish on the deals long term strategic and financial benefits. We're.
We're on track to deliver 20% to $25 million in year, two synergies and we remain confident and achieving year three run rate synergies of $75 million.
Continued strong free cash flow performance in the quarter has enabled us to delever at an accelerated pace. Despite the ongoing backdrop of the COVID-19 pandemic.
We further focused our portfolio by divesting red valve and signing an agreement to the best Abel.
And finally, we ended the quarter with a record backlog and a robust project pipeline.
We believe we remain well positioned to overcome any near term macro challenges and are confident and our strategy to drive profitable growth over the long term.
With that we'll open the line for your questions.
Thank you at this time, we'll be conducting a question and answer session if.
If you would like to ask a question. Please press star one on your telephone keypad.
A confirmation tone will indicate your line is and the question queue. You May Press Star two if you would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Our first question today is from Daniel Moore of CJS Securities. Please proceed with your question.
Joe Christina and good morning, Thanks for taking the questions of the color.
Let me start with advanced process solutions and.
And you mentioned Asia, just talk about where the incremental demand is coming from.
Are you seeing a significant pickup and auto are there other end markets and.
And how are you surprised all of just how resilient the spin.
Yes, good morning, Dan. Thank you for the question.
Of regarding Aps and and.
And where the strength is and orders.
And the quote pipeline Asia is very strong China is very strong right now and really it's largely.
Due to their continued expansion of capacity in the country and so it's really.
A build of capacity around base resins, and and engineered plastics and we continue to see that strength and notes and that momentum and again I think that's just driven really by two things one and their desire to be more self sufficient and the production of plastics and secondly.
The economy there for.
And for local consumption is pretty strong is probably our strongest.
Area of demand around the world.
Very helpful and and you get pretty good very good color, but you know again the margins Batesville work for just off the charts congrats for the team on.
And on the Incrementals and the execution, maybe just talk about the glide path towards normalization and in the back half of the year of beyond this quarter, which obviously will be strong I know it will be volume dependent, but where do we settle back out once the dust to settle the Kristina and in terms of maybe a longer term modeling.
On the Batesville side of the business.
Yeah. So.
And obviously that's difficult because of lot of this is volume I can tell you from the and you know looking at the back half we are going to see inflation hit us, particularly around steel and and wood.
And so we have experienced the deflation in that area. So we're gonna have inflation. There I think as we look to what normal is and I'm not sure. What that is the team has continued to take actions to focus on productivity and simplify their.
Their business their operations.
I think if we just kind of go back to our long term, we believe EBITDA margin will be around that 20% to 21% I think that's probably a good assumption to move forward with them. Obviously that is when volume stabilizes and so if we see a significant drop in volume.
Can probably expect to see more pressure on on the margins, but for the long term I think it's probably fair to think about that 20% to 21%.
Really helpful and and maybe one more molding tech solutions MTS.
Where remind us where of backlogs now compared to where we were a 12 quarters ago made up of for Milacron and started to seeing some pressure in China.
And how quickly does that backlog typically convert to revenue, particularly on the injection molding side. Thank you.
Yes, so we have very strong backlog and you know going back to eight eight or so quarters 810 quarters, it's probably the highest backlog. It is the highest backlog that we've seen and the business and so when we think about the conversion of that backlog is going to converge on.
On average between six to nine months I'm you know we have a couple of projects that are in there that are and will go.
Around 12 months, but on average it converts around six to nine months.
I would say another the other thing Dan one other thing I would just say you know.
We do believe that.
You know as we look at this backlog there was pent up demand and so obviously, we had a very strong quarter and.
So we expect probably backlog to come down a little bit as we go through the year, but nonetheless, you know very strong backlog position exiting of really all of the all of the business lines inside of MTS or and really get good position with the backlog of just one one of the business line and that's mines it's drew.
Moving that it's really.
Pretty good across both the hot runner business as well as the injection molding business strong yes.
Alright, well I of 100 more questions, but ill jump back in queue, and maybe get a follow up for two and thank you.
Thanks, Dan.
The next question is from Chris Howe of Barrington Research. Please proceed with your question.
Good morning, Thanks for.
For taking my questions.
Good morning, Good morning, Chris.
Good morning, starting on the MTS segment are you you.
You mentioned the outlook.
And some second half pressure on margin versus last year.
Due to a higher mix of injection molding.
Perhaps you could talk about.
Injection molding versus.
The other part of the business, which has.
Consistently shown very high adjusted EBITDA margins is there an opportunity and injection molding.
Further down the road to improve those margins.
Versus the other part of the business.
Yeah. So.
I think you're exactly right. So the the hot runner part of the business is a higher margin part of the business and on the injection molding side is we're seeing.
Strength in orders on the injection molding side, it'll be a larger percentage of revenue as we go into the second half of the year.
And we do see opportunities, particularly over the longer run to improve margins in that part of the business and really that's driving good lean business practices and the hillenbrand operating model for that business.
And so we're very focused and and.
And working with that supply chain group to continue to drive process improvements that will improve both working capital, but also margins over the longer run Christine anything you want to add to that Chris I think just as a reminder, when we think about the EBITDA margins between the the essentially the hot runner business and the injection molding business.
Theres, a 15 point difference and EBITDA margin and so that is why you're going to see pressure on the margins and the back half and.
And you know I agree with Joe our focus throughout this and.
Integration is to ensure that we can deploy the hillenbrand operating model to increase those margins and injection molding, obviously, it's going to take time, and it's not going to get there overnight and we don't anticipate them to close the entire GAAP with with those.
Product lines, but we.
And we certainly expect and improved margins and injection molding.
That's great and a follow up.
It's hard to ignore it.
This uncertainty with the pandemic certainly has.
Created some certainty the to the upside for the Batesville segment tremendous leverage in the quarter.
Normalizing at 21% to 22% you've mentioned previously can you talk about the opportunity that this cash provides assuming these.
And these different strains and infections continue to rise it's going on.
Continue to generate not only stable, but increasing cash flow for the business.
Combined the where you are on the balance sheet.
Perhaps what I'm getting at is how do you view of the strategic opportunity set and the market versus three months ago and.
And.
I envision and the company could look much different and.
And one to three years.
Yeah. So.
I will tell you you're exactly right that the Batesville business has generated a tremendous amount of cash over the past.
Really now.
Three quarters going into the fourth quarter.
Continuous strong demand due to the pandemic.
Just related to the pandemic, it's very hard to predict what the future looks like we do expect the.
The number of deaths to start to drop in fact, we think we've sort of reached peak and we will see the number of deaths start to drop over the over this.
February and March timeframe, when and if we get back to normal it's not exactly clear and what what the various strains mean, the new the new strains of the virus mean over the longer term is also not very clear, but but certainly that cash flow has enabled us to help pay down debt.
More quickly than we had expected if you'd asked us for this.
Almost a year ago, maybe 11 months ago at a faster rate than we had expected.
And so we have a pretty solid.
Profitability growth strategy.
And we've over the last quarter and a half or so have released more investment and the business for high return projects organic projects.
And as we continue to pay down debt over the next quarter or so.
And we're more focused on the.
Being open to considering bolt on acquisitions strategic acquisitions that also we would expect to get really good returns on so.
Yes, I think we're in really good position with our balance sheet better than we expected again, a few quarters ago, and and the Batesville business definitely contribute to that with it with cash flow.
That's great Thanks, Joe and Kristina and one more if I may I just wanted to follow up on some comments you made on the last conference call.
In regards to North America, and the large volume ethylene system projects in North America how.
How is that in the quarter and what's your outlook there I know it's been slow.
And perhaps.
We're picking up some steam there.
Joe that it remains relatively challenged right now in North America related to the large polyethylene.
Projects and so we've seen a pretty significant shift to Asia and other parts of the world in terms of large projects that are out there and we would expect.
Work all the way through the close.
And some reasonable period of time so.
We continue to see sort of stable North American business, but.
But right now it's pretty we expect it to be more and more stable as we go forward, but right now it remains pretty weak and North America and in terms of.
Expected order intake and again more than offset by strength in China, and and other parts of the world.
Great. Thanks for taking my questions.
Hey, Chris just one clarification as well and you know when I talked about Batesville long term I said, 20% to 21% EBIT.
EBITDA margin you mentioned 'twenty, one to 'twenty two I just want to make sure of that you know you have that failure.
Yes got it thank you Joe.
The next question is from Matt Summerville of D. A Davidson. Please proceed with your question.
Thanks, a couple of questions.
I want to make sure I understand sort of the cadence, we should expect and MTS as it pertains the hot runners versus injection molding. So you're talking about <unk> 37 to 40 of growth in Q2.
Can you put that in the context of those two product categories and what the expectations would be for the balance of the year, there that would get you to mid teens.
Yeah. So we are going to see them really.
When we think about the growth for MTS on the hot runner business.
General and generally we are going to continue to see the growth that we've been seeing it's kind of stabilize a little bit.
On se.
You know high single digits, our growth is what youre going to see them, maybe in the third quarter, that's going to come down a little bit and the fourth quarter for the hot runner business, and then youre going to see that completely flip youre going to see significant growth.
On the injection molding business and so your X you can expect to see probably high teens growth and the back back half of that quarter for injection molding.
Got it and then with respect to kind of incoming order rates overall and that business can you comment on what you've seen thus far in the calendar year and MTS and then.
I want us or just spend the second just touching on the auto I would think given the all of the platform delays all of the new model launches that have been pushed to the right. As a result of this pandemic I would think there would seemingly be some pent up demand in the auto so if youre not seeing that now when Willie.
You see it.
Yes, so I think related to auto let me just break out the two parts of the business and MTS.
We're seeing some demand and the mold masters side or the hot runner side of the business.
On the mold Masters branded products the hot runners. So we are seeing an increase in.
On.
And in demand there.
It's not back to sort of like historic levels, but but solid demand there.
But again still room to grow I think on the injection molding side. There we've seen the quote pipeline has picked up pretty significantly.
And is not converted to orders yet and so that's why if you think about the the.
On the injection molding side of the business, it's really about a lot of replacement of equipment and capacity expansion not so much driven by new models. So the the new model introductions are really the hot runner side of the business and we have seen some increase there sequentially. It's the injection molding side, where we see.
The quote pipeline starting to pick up.
But if not has not converted to orders and again, that's the overall volume and replacement of equipment, that's going to drive demand.
And those orders closing.
And then Joe maybe just talk about what you've seen in your order activity.
Olander year to date.
Across the board or in a particular segment.
Oh sure across the board would be great.
Yes, so of course, I won't really talk about batesville, because thats, the short cycle and pretty obvious.
And then if you look at the.
The Aps segment orders have held up pretty well.
So you continue to see the backlog grow and the Aps segment still expect to see solid demand.
Across the board there service has been a little bit challenged but we expect to continue to close large orders and see service improved sequentially as we move through the year.
And the MTS segment, and we've had the solid demand and the hot runner side and Thats really a continued.
Growth that we've seen on the hot runner side, just sort of like of continued sequential build in demand on the hot runner side.
And then we continue to see strong demand on the injection molding side, we had a big spike in orders and in the last quarter and we.
We expect not as not as much growth on a sequential basis, but still very strong demand on the injection molding side is what we're seeing thus far.
And then just on.
One more on here if I can.
And in the slide deck Slide 13, you indicated you expect free cash to exceed adjusted net income of Christina recognizing you probably any day.
Based on being a little bit of a wildcard, but what would be sort of a realistic conversion rate that we would expect this year coming off of what was the really good fiscal 'twenty.
Yeah, I would say about 100%. So last year, we had a really strong back lapped last quarter back half of them.
As we look at this year.
Got a lot of large projects that we're delivering we're using working capital and our co purion business kind of and in the back half I would expect about a 100% conversion.
Got it thank you guys.
Thanks, Matt.
The next question is from John <unk> of Sidoti and company. Please proceed with your question.
Good morning, everybody.
Just a follow up I guess on unmatched thoughts here Joe.
Like the first quarter, there was some satisfaction of pent up demand, we're going to see that into the second quarter can you kind of give us a sense of how much should may be deferred or did you expect to come in and when that reaches equilibrium.
The opportunity pipeline of pent up demand in the coming year.
Yes so.
I think we I think it depends it's a little bit different for each of the businesses in terms of.
And where they weather the long cycle of medium cycle of short cycle, and so just kind of going through the business and putting batesville.
Side, just sort of going through the business I think we've really seen so the the hot runner business and MTS, it's going to really flow with the global economy, and we've seen that come back with the global economy has has improved and we've seen strength in Asia, particularly China and that business, but as the United States and Europe continue to gain.
The strength, we would expect to see continued.
Continued improvement in the.
That part of the business again, probably particularly in North America and in Europe.
On the injection molding side, it's not completely clear.
Exactly how much of the orders that we're seeing now are really pent up demand and that's kind of a big spike and they'll get back to more normalized rates.
I would say that we've had good strong demand we had good strong demand and in the last couple of quarters.
And it continues service.
Parts and service continue to grow and.
And so.
Joe I think we will sort of level out to more.
Sort of.
Flattish slightly up sequential growth.
And we got a couple of really nice quarters in a row, a little bit that probably last quarter was.
In the fourth quarter was probably pent up demand.
And the first quarters, it feels a little bit more sustainable and again and I think we also have the upside of automotive as we look forward over the next.
The next few quarters.
So that's sort of the MTS segment, and then the Aps segment really we've had.
Exceptionally strong demand for large projects and so the long cycle projects demand has been good demand remains good again, a lot of that driven by Asia and some other parts of the world I think and the mid cycle of businesses. So think about the compounding machines and feeders.
We've seen modest.
On.
The kind of sequential growth and that part of the business and so I think that would be more sustained demand as the economy continues to improve around the world and.
And in parts of the service has been challenged and it's been challenged we're starting to see sequential growth and parts of the service. So we expect that to continue to grow and that demand to be very solid and sustainable over the long term. So you'll really I think in the.
And the Aps business, we sort of have this air pocket, where we have some larger projects that are pushed out that are and the backlog, but we continue to take orders and then I think as we.
We look forward those projects get released.
Expect to continue to see some large projects close and then and then we'd see.
And continues.
Strength in parts of the service and then the mid cycle business.
As the World economy continues to improve we will will improve.
Sequentially as well so that may have been a little bit complicated answer I hope that helped though kind of get a sense of how we see north of others.
And what I was looking for Joe.
Steve you kind of outlined and depth the impact of commodity costs on batesville, but can you talk a little bit about commodity costs and the industrial platforms and how that impacts of them going forward.
Yes, so and when.
Let me take it by the separate segments, so generally and Aps with our large projects and.
But we are able to essentially pass that you know the way the the business works, we're essentially able to pass that on to our vendor. So as you can imagine we know the order and we will place our purchase order on our vendor immediately so that we can lock and the price so.
Commodity and while there is some commodity inflation and Aps is not nearly as significant and.
As Batesville and MTS, but we are seeing on MTS as we are saying.
On inflation, we will continue to see inflation and.
Through the rest of the year, primarily and steel.
And so and.
We expect on the back half of the year and MTS.
And a little over 100 basis points of pressure.
On the margin due to inflation and that business.
Excellent thank you and.
And regarding the realization of the synergies and integration costs for the current year can you just talk a little bit about the cadence of it.
Realized net 20 to 25 and $25 million to $30 million.
Yeah. So.
This quarter, we had.
We had $6 million of synergy.
And that that hit the quarter of.
Fair amount of that was carryover from actions that we had already taken and so we continue to see that carryover I think when we think about the synergies the 20% to $25 million of good kind of cadence would be just divide that by for and youre going to kind of see that.
On pretty evenly across the quarter I'm, sorry, the year and.
As it relates to the cost.
And.
Fairly you know.
You're probably going to see a bump and the second and third quarter and.
Some of that say $25 million to $30 million.
It's going to be higher I would say and those couple of quarters.
Yeah.
That's all the time, we have for questions today, I would like to turn the call back over to Joe Raver for closing remarks.
Thank you operator.
Just want to close with saying, we're very focused on executing in this in this challenging environment.
On the organization is working hard to execute on what we can control.
And to react and deal with what we can't control, but we're very confident in our ability to execute and our ability to continue to.
Be flexible and resilient regardless of what happens with.
And with the pandemic.
And we're excited about getting debt pay down and our balance sheet and good shape, we are starting to see.
Increasing strength in the acquired of Milacron businesses.
And and so we're bullish on the future and look forward to continuing to invest and profitable growth. So with that I want to thank everyone with participating in the call. Today, we really appreciate your interest and hillenbrand and we look forward to talking to you again in May.
And we reported second quarter results have a great day, everyone. Thank you.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
[music].
And then.
And.
[music].
And.
[music].
And.