Q2 2021 Hillenbrand Inc Earnings Call
Good morning, everyone and welcome to the Hillenbrand's second quarter of fiscal 2021 earnings conference call.
A replay of this call will be available until midnight Eastern time Wednesday may 19th 2021 by dialing 1877.
4078012 toll free in the United States, and Canada, or plus 141290 to one zero of one three internationally and using the conference I'd number 137186.
Two seven.
This webcast will be archived on the company's website at IR Dot Hillenbrand dotcom through Friday June 4th 2021.
If you ask a question during today's call. It will be included in this recording also note that any recording transcript or other transmission of the text or audio is not permitted without hillenbrand's written consent.
At this time, it's my pleasure to turn the conference call over to coffee back the Ari Senior director of Investor Relations. Mr. Back TRA. Please go ahead.
Thank you good morning, everyone and welcome to Hillenbrand second quarter of fiscal 2021 conference call I'm joined by our President and CEO, Joe Raver, and our senior Vice President and CFO Kristina Cerniglia I want the direct your attention to the supplemental slides posted on our IR website that will be referenced on today's call turning to <unk>.
Slide three a 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, including pro forma comparisons for our sector.
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 Kevin.
And good morning, everyone.
Thanks for joining us today, and we hope that you and your families are safe and well.
I'd like to begin by thanking our employees around the world for their continued dedication during the pandemic.
Over the past year, our number one priority has been and continues to be the safety and well being of our employees their families our customers and the communities in which we live and operate.
As the vaccine is rolled out in the United States, we've seen infection rates hospitalizations and deaths continue to fall in recent months how.
However in other parts of the world, especially in India, we've seen the number of serious infections spiked significantly.
We remain vigilant and committed to the health and safety of our employees and continue to fall of recommended safety protocols in all of our operations around the world.
Virtually everyone's normal routines have been disrupted by the pandemic both at work and at home and despite these many challenges our employees have risen to the occasion and have gone above and beyond to serve our customers.
We're very fortunate to have such a dedicated group of employees across the globe and for this I am grateful.
Before I get into the highlights of the quarter let.
Let me spend a few minutes on the execution of our strategy as outlined on slide five.
As we have.
As we've consistently communicated we're focused on executing four key strategic pillars as we work to build hillenbrand into a world class Global Industrial company.
The first is the strengthen and build business platforms, both organically and through M&A.
The Milacron acquisition represented a major step in the execution of this strategic pillar and we're pleased by the success of our integration and the continued rebound in demand for MTS products.
As a reminder, this acquisition added industry, leading hot runner and injection molding product lines to the hillenbrand portfolio.
We remain confident in the long term growth prospects of this segment.
Given the strength of our balance sheet, we expect to accelerate growth investments, both organically and inorganically with the focus on strengthening and building, our large product platforms and Aps and MTS.
For example, our focus on growing the recycling business is gaining momentum and we now have solutions and chemical and solvent based recycling. In addition to our well established offerings and mechanical recycling.
This is an exciting market that we expect to grow significantly across the globe over the coming years.
Our second strategic pillar is to manage batesville for cash.
<unk> 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 Batesville.
Batesville has outstanding cash flow over the past several quarters played a key role in reducing our debt and underscores the important role batesville place on our portfolio.
The third pillar of our strategy is to build a scalable foundation for growth using the hillenbrand operating model.
The acquisition of Milacron has provided a unique opportunity for us to transform and scale many of our shared functional business processes in areas such as <unk>.
<unk> and finance.
This effort to standardize processes and services and leverage best practices has helped us realize synergies and bill of scalable foundation to grow on our platforms more efficiently and effectively.
We're also leveraging our combined spend through our global supply management team.
We continue to add strong experienced global talent in this area and are seeing the benefits as we work through this period of rising inflation and supply chain disruption.
Our fourth and final pillar is to effectively deploy strong free cash flow.
We have a proven track record of quickly deleveraging following acquisitions, allowing us to maintain a flexible balance sheet. So we can continue to invest through economic cycles.
We're confident in our ability to continue to generate robust free cash flow maintain a strong balance sheet and grow our company, while returning capital to our shareholders.
As we communicated last quarter, we lifted the temporary suspension of our share repurchase program and announced that we will resume consideration of strategic bolt on acquisitions.
Since then our financial flexibility has been further enhanced through our strong cash generation in the long term financing actions, we took in the quarter.
We're increasing organic investments in our businesses, while continuing to evaluate inorganic opportunities to accelerate our growth.
As always we will remain disciplined in our approach to deploying cash.
Now, let me turn to the business.
We had a very strong second quarter in each of the segments with solid revenue strong margins and significant cash flow.
We ended the quarter with a record backlog of $1 5 billion providing.
Providing significant momentum in our industrial segments heading into the second half of our fiscal year.
The integration of Milacron continues to go well and we are building our organizational capabilities by applying the hillenbrand operating model across the enterprise.
We continue to simplify and focus our portfolio during the quarter, we completed the sale of Abel and remain on track with our previously announced intention to divest <unk> global.
Our operating cash flow performance in the second quarter was exceptional and we reduced our net leverage ratio by over a half turn sequentially to finish at one seven times net debt to EBITDA.
We added key talent to our leadership team with the hiring of Leo <unk>, Our senior Vice President for operations Center of excellence and the Hillenbrand operating model.
Leo is a proven senior executive with great operational experience at some very good companies, including Thermo Fisher Danaher and Belden.
I'm also pleased to let you know that Tori Flynn has rejoined the company as our first chief sustainability Officer.
The <unk> will report directly to me and I look forward to working with her to accelerate our progress in this area.
Later this summer we plan to issue our second sustainability report to share the operational progress our businesses have made on our journey over the past year.
We're driving accountability and transparency by building processes to capture and measured progress engaging with our stakeholders and building on our disclosure practices.
We remain committed to working with internal and external stakeholders and the implementation of our sustainability strategy.
Accelerating investment in the ESG is critical to meeting our long term goals and the addition of the Chief Sustainability officer adds to the overall strength of our management team.
Again, I look forward to working with Tori as we increase our efforts in this important area.
So in summary, I am pleased with our execution this quarter and encouraged by the continued momentum in our industrial segments as evidenced by our third consecutive quarter of record backlog.
As we entered the second half of the year, our priorities remain focused on driving profitable growth in our large platforms cash.
<unk> the full benefits of the Milacron acquisition.
And strategically deploying cash to drive long term shareholder value.
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 I'll be referencing pro forma results, which exclude red valve and Abel and the Aps segment, and the simple business and the MTS segment.
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 team has built on their strong momentum with continued revenue growth strong margin performance and exceptional free cash flow we.
We are pleased with the results, particularly given rising inflation and continued uncertainties caused by the pandemic.
Total company backlog increased over 30% year over year on a pro forma basis to a new record of one $5 billion.
Sign of continued strong demand for our highly engineered solutions and products in both EPS and MTS.
We delivered total revenue of $722 million, an increase of 11%.
Excluding the impact of foreign exchange total revenue increased 8%.
On a pro forma basis revenue increased 18% driven by strong growth within the MTS and Batesville segments.
Adjusted EBITDA of $134 million increased 21% and adjusted EBITDA margin of 18, 6% increased 160 basis points.
On a pro forma basis, adjusted EBITDA of $133 million increased 29% driven by volume and productivity including synergies.
We reported GAAP net income of $78 million or of $1 three per share compared to a loss of 99 cents in the prior year due.
Each of the gain on the sale of Abel and prior year impairment and inventory step up charges.
Adjusted net income of $75 million resulted in adjusted earnings per share of <unk> 98.
An increase of 28.
Our 40% driven by strong growth in MTS and Batesville.
The adjusted effective tax rate for the quarter was 27, 1% of decrease of 100 basis points from the prior year due to a change in the geographic mix of income year over year.
Hillenbrand generated cash flow from operations of $193 million, an increase of $165 million compared to the prior year.
This increase was primarily driven by higher earnings and favorable timing of working capital requirements, particularly strong customer advances in both the Aps and the MTS segment.
Capital expenditures were approximately $6 million in the quarter lower than anticipated due to project timing.
We expect to return to a more normal trajectory in the second half of the year.
We paid down $182 million of debt and returned $16 million to our shareholders in the form of cash dividends.
We recognized $8 million of incremental synergies in the quarter, and we expect to deliver 20% 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 had continued strong performance in the second quarter with revenue of $166 million, increasing 20% year over year.
The estimated increase in deaths due to the COVID-19 pandemic were partially offset by an estimated increase in the rate at which families opted for cremation.
The circumstances driving the increase in burial casket demand are unfortunate and unprecedented.
We do expect that to decline in the second half of the fiscal year, both sequentially and on a year over year basis.
Operating leverage and productivity initiatives contributed to strong margin expansion the slightly behind expectations.
Adjusted EBITDA margin of 26, 9% improved 380 basis points over the prior year, despite higher than expected increases in commodity inflation and transportation and manufacturing costs required to respond to the surge in demand driven by the COVID-19 pandemic and the <unk>.
Quarter.
Turning to molten moulding technology solutions, we saw continued strength as both revenue and margins exceeded our expectations.
Revenue of $255 million increased 28%.
The 47% on a pro forma basis in comparison to the prior year.
Excluding the impact of foreign exchange revenue increased 45%.
Sales of injection molding capital equipment more than doubled on strong demand and custom molders consumer goods medical and packaging.
Importantly, aftermarket parts and service sales improved and were higher on a year over year and sequential basis.
India continued to rebound strongly in the quarter as well with both injection molding and heartland of our sales up across all end markets.
We continue to monitor the COVID-19 situation in India closely as the local governments announced new virus related shutdowns. We anticipate these disruptions will have an impact on our fiscal third quarter.
Adjusted EBITDA of $51 million increased 59% and 89% on a pro forma basis with adjusted EBITDA margin of 20%, increasing 440 basis points compared to the prior year on a pro forma basis.
The improvement was driven by higher volume and productivity initiatives, including cost synergies.
We are encouraged with these results and remain focused on leveraging the hillenbrand operating model to drive sustainable operational improvements.
Record order backlog of $362 million increased 93% compared to the prior year and 24% sequentially driven by an increase in injection molding equipment orders.
Activity was strongest in the custom Mulder automotive and construction end markets.
Turning to advanced process solutions, Aps revenue of $301 million decreased 3%.
On a pro forma basis.
Revenue of $295 million was flat to prior year.
Excluding the impact of currency revenue decreased 5% on a pro forma basis.
The sales decline was primarily driven by the expected decrease in large polyolefin systems due to customer driven delays on certain projects.
And lower parts and services sales.
Recently, however, we have started to see signs of a pickup in service and aftermarket parts of orders, which we expect will translate to sequential revenue growth in the second half.
Longer term, we continue to see opportunity for growth in this area as the installed base of our large systems continues to grow.
Adjusted EBITDA margin of 18, 5% was flat compared to prior year on a pro forma basis and higher than expected coming into the quarter.
The headwind from lower volume and inflation was largely offset by pricing cost containment actions and productivity improvements.
Order of backlog reached a new record high of $1 $2 billion at the end of the second quarter, an increase of 22% year over year, we continue to see solid demand in 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.
We have not received any cancellations from our large project customers, nor do we expect to.
Turning to the balance sheet net debt at the end of the quarter was $867 million and the net debt to adjusted EBITDA ratio fell by over half a turn sequentially to one seven times.
As of quarter end, we had liquidity of approximately $1 2 billion, including $345 million in cash on hand, and the remainder available under our revolver.
As of the March 31, we had no borrowing on our revolver.
In February we issued $350 million and a 10 year senior unsecured notes at three and three quarters.
<unk> in order to secure long term financing at attractive rates for general corporate purposes, including to repay debt and replenished available cash after debt repayment.
In the quarter cash proceeds from the sale of <unk> were $106 million we.
We paid down $182 million of debt, including prepayment of our $500 million term loan due in 2024 with cash on hand and revolver borrowing.
We have no near term debt maturities and we will continue to leverage the hillenbrand operating model to drive efficiency across the business.
Our efforts will remain focused on improving working capital efficiencies, particularly in the MTS segment.
Turning to capital deployment, we are pleased with our aggressive deleveraging progress, which has given us greater flexibility to invest in both organic and inorganic growth. We are now comfortably within our leverage guardrails, and we'll prioritize reinvesting in the business and evaluating strategic investments in <unk>.
High return opportunities.
Let me conclude my prepared remarks, with our near term outlook.
Similar to the review of quarter quarterly results.
I'll be referencing pro forma results in this section, which exclude red valve and Abel and the Aps segment, and the simple business and the MTS segment.
We are providing guidance for the third quarter of fiscal 2021, given the continued uncertainty due to the global pandemic.
Even though disruption from the pandemic has lessened in the U S. We continue to see adverse impact from the resurgence of COVID-19 in our international locations primarily India.
We expect hillenbrand total third quarter revenue to increase year over year in a range of 13% to 17%.
We expect adjusted EBITDA in the range of $110 million to $120 million and adjusted earnings per share in the range of 70 to 80 for the third quarter.
As we enter the third quarter, we anticipate earnings pressure from lower Batesville volume, which carries the higher margin inflation, a return of sales marketing and <unk> spend which was curtailed during the second half of last fiscal year.
And additional investments to fuel profitable growth.
Starting with Batesville in the third quarter, we expect revenue to decrease 7% to 11% year over year as we expect a significant drop in burial demand due to a reduction in COVID-19 related deaths in North America.
We expect this trend to continue for the rest of the year due to the high level of COVID-19 related deaths last year.
We expect adjusted EBITDA margin of 18, five to 19, 5% as we anticipate productivity initiatives to partially offset the adverse impact of lower volume and rising inflation.
And advanced process solutions, we expect third quarter revenue to grow year over year in the range of 18% to 23%.
Primarily due to strength in revenue from large plastics projects as well as aftermarket parts and service revenue.
Though delays still persist with some of our large polyolefin projects on the backlog, we see strength in other end markets like engineering plastics food and recycling.
Furthermore, we see a reduction in COVID-19 related delays that impacted our aftermarket business also contributing to our year over year revenue growth.
We expect adjusted EBITDA margin of 18, eight to 19, 2% to be lower from a year over year perspective down of 130 to 170 basis points as the headwind from inflation project mix and a return to a more normal spending patterns.
That were curtailed in third quarter of last year is partially offset by price and productivity initiatives.
Turning to molding technology solutions, we expect strong third quarter revenue growth in a range of 23% to 28% over prior year as.
As demand continues to be strong and both hot runner and injection molding product lines.
Though we have accounted for some disruption due to the resurgence of COVID-19 in our international locations, primarily India any significant and prolonged shutdown will have a negative impact to our results.
We expect adjusted EBITDA margin of 19, 5% to 20% down 50 to 100 basis points year over year as the benefit of higher volume and continued productivity improvements is expected to be offset by higher injection molding sales, which carries lower margins on hot runner systems.
<unk> inflation and a return to more normal spending patterns with respect to investments.
Given the uncertainty that remains is due to the pandemic, we will only provide an outlook for our industrial segments for the fourth quarter and full year.
And the advanced process solutions segment, we are expecting revenue in the fourth quarter to be up high single digits year over year, resulting in mid single digit growth for the full year.
This is an improvement to the outlook, we gave last quarter, driven primarily by strength of our large plastics projects and growth in the aftermarket business.
We also expect adjusted EBITDA margins in the fourth quarter and the full year to be slightly down year over year due to inflation growth investments and unfavorable project mix.
Really offset by pricing and productivity.
And the molding technologies segment, we expect fourth quarter year over year revenue growth in the mid teens and full year growth in the high teens, which is an improvement to the outlook that we provided last quarter.
Driven by our strong backlog and continued order momentum and multiple end markets.
We expect of year over year decline in our adjusted EBITDA margin in the fourth quarter due to a return of normal spending patterns of higher proportion of injection molding of equipment, which come at a lower margin compared to our hot runner systems and an increase in growth investments.
For the full year, we anticipate moderate adjusted EBITDA margin improvement as the additional volume leverage and productivity, including cost synergies are partially offset by higher injection molding sales inflation and additional growth investments.
As a reminder, our outlook for the year is contingent upon no prolonged shutdowns in any of our key markets due to the resurgence of COVID-19.
Our team has demonstrated the ability to execute through challenging circumstances and I am confident that we can continue the momentum in the back half of the year.
And now I'll turn the call back over to Joe.
Thanks Kristina.
Let me leave you with a few final takeaways before we take your questions.
We ended the quarter with record backlog positioning us well to drive growth on our large platform businesses in the second half of the year and beyond.
Additionally, the milacron integration is proceeding well and we remain on track to achieve our three year run rate synergies of $75 million.
The work, we're doing in procurement and operations is improving the resiliency of our global supply chain and helping to protect our margins in an inflationary environment.
We further simplified our portfolio by completing the divestiture of <unk> in the quarter. We're on track in the process to divest <unk> global.
And finally, we significantly strengthened our balance sheet over the past 12 months and are now focused on investing in growth initiatives. We believe we remain well positioned to overcome any near term macro challenges and are confident in our strategy to drive profitable growth over the long term.
Before we open the line for Q&A I do want to take a moment to acknowledge and extend my sincere. Thanks to our former Board member Tom Johnson, who retired this week after 13 years of outstanding service on our board.
I enjoyed working with Tom over these many years and believe our company benefited significantly from his experience dedication and perspective.
On behalf of everyone at Hillenbrand I would like to wish Tom all of the best in his next chapter.
With that we'll open the line for your questions.
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One moment, please while we poll for questions.
Our first question today is from Matt Summerville of D. A Davidson. Please proceed with your question.
Thanks. Good morning on can you talk about what you expect the full year, all absorbed cost pressure to be for Batesville in fiscal 'twenty, one, particularly as it relates to.
Inflationary pressure.
With steel transportation costs overtime costs et cetera.
So good morning, Matt.
Yes, as it relates to batesville, so in the back half of the year, we do expect inflation of roughly.
$13 million to $15 million.
And we expect pricing to cover.
Probably about.
A third two of half of that and so.
On the.
Therefore, we will be exposed to that incremental inflation.
Now with that being said our.
Annual price increase goes into effect.
In October and which we will be recovering price at that point in time.
Got it thank you Christina on them.
As we go forward can you talk about the plastics funnel and backlog with respect to the traction youre getting with recycling and eco friendly materials is that becoming.
A more material portion of your overall business some of what's the kind of the go forward growth rates look like there.
Hi, Matt It's Joe.
Yes so.
There's two different parts there.
There is no question that if you look back into the pipeline both for recycling materials, and then plastics made out of bio materials the quote.
Pipeline is very strong and it's been continues to grow and has grown over the last quarters, but that growth is accelerating and so on.
Of our quote pipeline is good.
We continued to close jobs there in that part of the business, while small continues to grow particularly on the co purion side as.
As I mentioned in the prepared remarks.
Most people when they think about recycling they think about <unk>.
Channel recycling, where products are shred and cleaned and then run through.
Sort of the process to make Palo.
It's recycled pellets, there's also chemical and solvent based recycling, which really reduces the plastic back to really very close to its original state as is the hydrocarbon and so we're now well positioned in all of those.
All of those parts of the recycling business.
And growth is right now continues to be in Europe, where.
There is a longer history of recycling mandated in the.
Local municipalities, but we're seeing that demand for that grow around the world and we'd expect that to continue to grow not just for a couple of years, but for quite a long time.
And then in terms of bio resins plastics made out of different types of resins, we are seeing that across all of the plastics businesses. So the hot runner side. The continued to build their database in terms of how.
On the plastic behaves when it's heated and injected and then also in our injection molding machine really very similar kind of database being built so we're very active.
On on really all of the plastics product lines around bio resins.
Sure.
And recycling so hope that answers your question.
Yes. Thank you guys I'll get back from chip.
Thanks, Matt.
The next question is from Daniel Moore of CJS Securities. Please proceed with your question.
Thank you and good morning.
The interesting I actually wanted to touch on that topic as well. So maybe you can elaborate a little bit on the <unk>.
<unk> positioning and landscape and some of the more.
And the emerging recycling areas.
And eco friendly areas relative to your kind of legacy positioning and where do you see this as a percentage of revenue.
EPS on MTS say three to five years from now.
Yes, so Dan Great question, So one of the things to keep in mind about our.
The solutions, particularly on the API side as it relates to recycling we are continuous process. So our extruders are of continuous process as opposed to batch process and so all of the things that we do that move to continuous process are important and so as scale gets bigger and we also tend to do larger systems. So as scale gets bigger.
Like we've seen in the mechanical recycling, we're really well positioned and feel like the market is moving towards us both on the post consumer side, but also on the industrial side.
And then it's the same with the other types of recycling.
As the scale of those things increase those those applications increase and the technical specifications continued to increase.
As consumers demand more for example post consumer waste in the in the final product.
Making sure that debt those final of pellets in the final product is of high quality gets sort of more and more technically demanding as debt.
Percentage of post consumer of post recycled materials increases so we feel like that the market is moving towards us and our capabilities.
In this area.
I would say if you think about our polyolefin systems as an example.
We are providing large systems in many cases.
We are not really of large systems provider in recycling, we do have a number of the key components.
But as we continue to grow we get better and better understanding how the systems work how to make the entire system not just our immediate extrude or for example, more productive and effective but also the entire system works how the applications work.
We continue to be really at the very front end of what's happening in recycling and are really well positioned to do a good job in that market and win over the long run.
Now, it's a very small part of our business today, especially when you think about revenue, but when you look at our pipeline.
It's growing pretty quickly, particularly on our kind of mid size.
<unk> and so it's hard to predict how this.
How this part of our business is going to unfold.
But I will tell you there is a strong push around the globe for increased capture of plastic materials and the circular economy concept.
So as that continues to grow it will be driven.
Quite honestly today.
The resin base Virgin resins are pretty inexpensive and so.
They continue to be a very big part of the market, but as more.
The legislative mandates and local mandates come out for increased recycled materials and the capture of the recycling the capture of it continues to improve around the world will continue to see this market grow pretty significantly we believe and again, it's not just the quarters or years. This is a.
Long term market that we expect will be significant.
For us in the coming years, and we're putting a lot of attention on this market as we think it can be.
Very large in the in the long term.
Very helpful. I appreciate it.
Maybe just talk a little bit about if we look beyond the guide in fiscal 'twenty, one and into next year and MTS in particular with injection molding accelerating how do we think about the incremental margins on that business, you've got the remaining synergies and generally strong incrementals on the one hand, but the.
The mix shift on the other towards kind of lower margin injection molding versus hot runners.
Reading the debt.
The the building backlogs correctly, so any commentary there would be super helpful.
Yes.
So Dan if you if you recall you know and as you know the hot runner business.
Snapped back.
A few quarters ago. So we've seen really good continued growth in the hot runner business around the world.
And we expect that to continue.
And then a couple of quarters ago, we saw a really big increase in orders for our injection molding machines. Those are now starting to go through.
The backlog and turn into revenue and so youll see in the second half and as we go forward.
Hum.
A lot higher injection molding equipment, which.
Overall brings the brings the the.
The EBITDA margin of the segment down.
But both but but inside the injection molding that margin continues to increase as we make process improvements.
And we get the benefit of flow through so volume is helpful. So so margin continues to increase in net injection molding business.
But the overall mix puts margin pressure on on the segment.
And again, we've seen really good orders on the injection molding side now for a few quarters. These last couple of quarters of had strong orders.
Both in the parts and service in the capital equipment.
On the injection mould or the of the Hot runner business continues to do well, but it is sort of saw its big spikes.
Big Big Snapback, a few quarters ago.
Yes, and I would just add to that Dan.
Our injection molding product line.
We are targeting high teens and in that.
That area. So today there are about mid teens margin with the center day, even though EBITDA margin.
With the synergies continued productivity increased volume our target is to get that those product lines up near.
High teens.
That is essentially our goal so over the long term you're going to see EBITDA margin expansion.
From from that Youre, not going to see it necessarily in 'twenty.
In back half of 'twenty, one 'twenty, two youre going to see some modest improvement, but I think over the long run.
Youll see that in that margin increasing.
Very helpful. Maybe last from me.
Of leverage done on an amazing job day, all comfortably below two times and falling quickly.
Will you shift your focus back towards.
M&A opportunistically buying back stock in the near term or kind of of remain focused on integration and synergy capture at least for the.
The next few quarters.
Yeah. Thanks, Dan So so you'll see and we've been talking about it now for a couple of quarters, we've really sort of turned our attention to profitable growth and that's both organic and inorganic in executing our longer term profitable growth strategies.
I think from the inorganic side.
Had a number of projects that we either slowed down or put on hold in the.
At the height of the pandemic and when we really were squeezing down costs, where theres just a lot of uncertainty in the world. So youre starting to see those investments continue to come back and flow through.
And that will contribute to revenue growth as we go forward on.
On the inorganic side.
There's not just sort of.
Financial capacity to do deals. There is also a management capacity and we still have a lot of work to do on the milacron integration and so it's going really well, but we're not finished with that and so we do have.
A significant number of high quality dedicated resources driving the integration of the milacron.
Ensuring that we get the long term not just the financial benefits from synergies, but also of the strategic benefits and so.
As we look at inorganic growth, we're more likely to do.
Sort of bolt on or add on acquisitions inside of our platforms. So high.
A high priority would be in our Aps segment with the <unk> business, where they have both management bandwidth.
And we also have the financial bandwidth and they've got a very well defined long term growth strategy and then as we continue to roll the intensity of resources out of the Milacron acquisition.
We will look to do.
The acquisitions more broadly both of the platform within the platforms.
But also then.
Across the platforms as well so so right now we're really funding organic growth initiatives are probably more focused on the the <unk> business. The Aps business in terms of inorganic expectations, probably add on or bolt on.
As we continue to execute on the Milacron acquisition.
Makes sense, thanks again for the color.
Yes, Thanks, Dan.
The next question is from John <unk> of Sidoti <unk> Company. Please proceed with your question.
Joe and Kristina.
Good morning.
Going back to the to the process of a bit.
Really good growth from the backlog.
Moving to the fact that it's mostly Asia.
The questions there.
Can you talk a little bit about the North American and maybe European profile are you seeing any <unk>.
Increased quote activity in the kind of green shoots that suggests that.
The guidance might be turning around.
And Christine you also mentioned the exposure to India.
On the discount it can talk about which segments you are exposed to and maybe you can give us maybe.
Sense of how much exposure, maybe some sort of quantifying the number.
The risk profile over there.
Yes, great John Thanks.
I'll start and Christina can weigh in.
Yes, Youre right we have seen.
Strong.
Demand in the Aps segment in Asia, and particularly in China.
<unk> been in some other.
Countries like Russia, and some other places where there's been maybe underinvestment over the years in and plastics production capacity.
The backlog and the pipeline continues to remain strong.
In North America, we went through a very big investment cycle that lasted quite a long time.
The inexpensive shale gas that was really mainly polyethylene.
Production capacity.
Capacity expansion.
We've seen that really come down while there are some smaller projects in North America.
Of that backlog.
We're not backlog im sorry that that pipeline has come down and we've seen that move more to Asia now.
That's on the big systems.
We're also seeing.
In the engineering plastics of the more technical plastics, we're also seeing expansion of capacity in Asia.
And then also seeing that in different parts of the world, including North America.
And then I would say in Europe Europe is relatively.
Sort of flat to down overall.
What we see in Europe, mainly as we see a lot more.
The process food applications.
We are seeing some more technical applications.
For engineering plastics in Europe.
And as we talked about earlier more recycling applications in Europe as well.
So that might give you a sense of kind of the the demand.
Around the globe for some of the the.
Plastics production.
And then I think the second part of your question was India, India share yet, yes. So.
So in India. The main exposure that we have in India is.
In our injection molding business in India and.
Injection molding this quarter is probably about half of our MTS segments.
And then.
And if from from the injection molding side about 25% of its total revenue is in India.
So now with that said.
We do also use India given that we have of global supply chain. It does produce some components and assemblies that come to the United States.
And so there is it is an integrated supply chain around the world, but thats. The main risk that we saw in fact, we saw this last year I think in the third quarter last year.
The third quarter last year, we did see some shutdown in India and it did have an impact of it especially in the injection molding business.
For the quarter last year and then.
It came came back that pent up demand and came back.
Got it okay. Thanks.
After very helpful and then on regarding go.
Go ahead, Joe the us as AA, Jon I'd, just say the last thing is.
The situation in India is not good.
I mean, you can look at the news every day, it's really challenging has impacted our employees we've had.
The significant number of people who have contracted the virus and it's been it's been a real challenge. This this time around in India feels a little bit different than <unk>.
<unk>.
It doesn't doesn't seem really good in India, the United States. As you know is coming back right infections are down hospitalizations or down mortality is down.
But I think the situation in India is.
It's a pretty significant right now.
Yes.
And then regarding the.
Of course that were deferred.
A year ago that may or may not be coming back on.
The expense at this point or are there additional costs that we expect to come back online. This year that you had deferred from this year.
Yes, so as we think about the back half of the year, John we have about $20 million of cost that is going to come back into the back half of the P&L half of that is what I would call.
On.
On.
A return to normal spend whether it's tiny sales marketing compensation.
On that really makes up about half of that and then the other half is investments in growth. So we're investing in food recycling, some R&D and our MTS businesses and so you see that that investment in the back half as well.
Great. Thanks, Kristi and for taking my questions.
Have a great day, thanks John.
As a reminder, if you would like to ask a question. Please press star one on your telephone.
Our next question is from Chris Howe Barrington. Please proceed with your question.
Good morning, Joe and Kristina and thanks for taking my questions.
Good morning Morris.
Going off of the.
On the MTS segments can you comment on this segment on an end market basis.
How it performed in the quarter on an end market basis relative to your expectations going into the quarter and.
You talked about the backlog certain markets.
The molders automotive construction as we get through a full reopening.
The full recovery hope.
Hopefully sooner than later can you talk about the maturation of this backlog and the potential for growing in these specific markets.
Yeah.
So.
Interestingly, we've seen strength in virtually every end market.
Really strong demand. So is there just as a reminder, the.
The the hot runner business as a global business and it's experienced solid demand for a number of quarters. The injection molding business is more in the United States about 80% or 75% of the United States.
And then a little bit around the rest of the world and so really where we've seen strong demand is in the injection molding businesses in the United States has come back demand is still strong in India, and it's really across the board.
And so we expect.
The orders to continue to be good both on the capital side and the spare parts side.
So we're pretty bullish on the MTS segments.
From a revenue perspective, as well as margins continue to improve there so.
So good outlook on the MTS segment.
Perfect and my next question.
A little bit outside of the box, but I wanted to focus on spare parts.
Starting with MTS.
The injection molding and hot runners can you talked about.
Of the spare parts as it relates to these pieces of the businesses, respectively, and then going on the same topic in EPS.
Service aftermarket is picking up can you talk about the long term potential for the aftermarket piece within Aps is this more of the return to an absolute level or.
Is there some expectation that this can grow as a percent of a more normalized mix.
Yes, So let me start and then Kristina can weigh in so.
So on the NCS segment, the vast majority of the aftermarket business is related to injection molding equipment and so on the hot runner side those products have a shorter life cycle 10, there are some replacement parts, but they tend to be it's a relatively small part of the business on the injection molding side of the business.
It's a much larger part of that business and so we're seeing that demand come back kind of to normal levels. We do expect that to continue to grow and us to grow a bit faster than the market in that segment and thats pretty good margin business for us.
And so that part of the business, we'd expect to continue to grow.
On the Aps side.
So on the API side, we did have a decline and to be honest with you. We were a little surprised by the decline in aftermarket parts and service on the Aps side, we expected service to be lower because it's hard to get people into plants et cetera.
And what we saw over the last year is particularly about a year ago. We saw a decline in orders, particularly for spare parts for the larger polyolefin plants and so these these are longer cycle spare parts of actually in the backlog for four.
The four quarters or so.
Good margin part of that parts and service business. So.
So we've seen orders come back and so we're kind of back to where we were pre pandemic in terms of an absolute.
Orders on the spare parts parts of the service aftermarket and Aps.
But what's happening, we're seeing a little bit of mix pressure because.
We're seeing sort of engineering plastic shorter cycle spare parts, which are a little bit lower margin coming into revenue faster than the.
And then the the spare parts for the really large systems, which we have which are a little bit more profitable. So we expect that.
Aftermarket part of the business and Aps to continue to grow.
We expect to see a mixed benefit sort of the intra category mix benefit where we'll get back to more normal kind of profitability in that.
Segment from a product mix perspective, and then over the long run.
<unk> has put a lot of large projects in place and Thats, the big driver of our spare parts as well as the profitability of the spare parts business and so we expect the long run rate runway of good growth.
On in aftermarket parts and service as the.
Those as those larger systems continued to age around the world.
And we are close to those customers and feel like we can manage that.
Of demand really well.
And do a good job keeping that keeping that demand so.
So again I think also some retrofits and rebuilds that were pushed out we'll start to see those coming through so so we expect the parts and service business to continue to grow and then.
And then given the number of large projects, we've done as a percentage of revenue it will continue to increase.
On law on a long term trend, yes, and just as it relates to total revenue remember we've got the strong backlog. So yes, we've got while we're going to see growth in spare parts and aftermarket youre going to see the growth in these large projects so as the capital the capital side of the business.
That's perfect. Thank you, Joe and Kristina I'll hop back in the queue.
Got it okay.
Thanks, Chris.
Okay.
There are no additional questions at this time I would like to turn the call back to Joe Raver for closing remarks.
Well first.
First of all I want to thank everyone for joining us on the call today. We appreciate your your ownership of <unk> interest in hillenbrand.
As we head into the second half of the year.
We continue to remain very focused on.
Supply chain resiliency and handling the COVID-19.
On.
Infections and hotspots around the world, We've got a good history of doing that and really build a lot of flexibility into our supply chain, but we'll continue to manage that you'll notice in our remarks, and we're very focused now on capturing growth opportunities investing for growth and turning that into into cash flow.
We remain focused on the integration, we believe it's going very well, it's really great to see those businesses performing better on the MTS side, and we continue to drive the integration.
And then finally, given the strength of our balance sheet.
And the debt that we've paid down over the past 12 months.
We are continuing to look at investments and <unk>.
Both organically and Inorganically again for profitable growth.
We look forward to talking to you again in August when we report our third quarter results have a great day, everyone and thank you.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
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