Q3 2022 Hillenbrand Inc Earnings Call
Greetings and welcome to Hillenbrand's fiscal third quarter 2022 earnings call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host Sam Mines Berg Senior director of Investor Relations. Please go ahead.
Thank you operator, and good morning, everyone welcome to Hillenbrand's fiscal third quarter of 2022 earnings call I'm joined by our President and CEO , Kim Ryan and our senior Vice President and CFO Bob <unk>.
I'd like to direct your attention to the supplemental slides posted on our IR website, we reference on today's call.
Turning to 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 segments.
I encourage you to review the appendix in slide three of the presentation as well as our 10-Q, which can be found on our website for a deeper discussion of non-GAAP information forward looking statements and the risk factors that could impact our actual results with that I'll now turn the call over to Ken.
Thank you Sam and good morning, everyone.
You for joining us today I'd like to start by acknowledging our associates throughout the enterprise and truly grateful for their sustained dedication to hillenbrand and their determination and executing our strategy again this quarter.
Overall, we delivered a solid quarter of revenue and EPS growth led by a strong performance in our molding technology solutions segment.
Supply chain disruptions foreign currency headwinds and inflation continued to pose challenges across our business and the broader industry at large I am pleased with how our teams have responded.
Through our effective deployment of the Hillenbrand operating model, we saw our overall price cost coverage improved again this quarter to fully offset inflation on a dollar for dollar basis.
Additionally, we have executed our recovery plan to help mitigate the disruptions to our hot runner product line caused by the COVID-19 related shutdowns in China that we communicated on our Q2 call base.
Based on the current situation in China, we have not incorporated any impact from future Covid related shutdowns in China into our outlook, but we are closely monitoring the situation.
Our order pipeline remains solid across both the Acs and MTS segment, we did experienced customer delays for a few large polyolefin decisions that were expected to close in the quarter, but we've already seen some of those decisions materialized in the current quarter and we continue to see healthy demand for our large plastic systems, particularly.
Really in China, India, and the Middle East.
We remain laser focused on factors that drive our top and bottom line performance.
In regards to Batesville, we signed a long term contract with key customer in the quarter and the Batesville team continues to have great success in attracting and partnering with other large customers as well, which is a testament to their industry, leading products and services.
We will remain nimble and investing for long term profitable growth and managing expenses through various levers we can pull that will allow us to successfully navigate this environment.
As you know we have a strong track record of execution through up and down cycle enabled by the hillenbrand operating model and I am confident that we are well positioned as we move forward.
Now I'll briefly provide an update on our strategy and key priorities, including progress made on our sustainability journey.
As you know our strategy is centered around four pillars, which we believe have positioned us well to drive long term profitable growth and deliver meaningful value to our shareholders.
These pillars are first.
<unk> business platforms, both organically and through M&A.
Second to manage Batesville for cash.
Third build a scalable foundation for growth using the hillenbrand operating model.
And finally, effectively deploy strong free cash flow.
During the quarter, we continued to execute against our priorities. A few specific examples are we successfully achieved our synergy target for the milacron integration ahead of schedule.
We expanded into higher growth end markets through organic and inorganic opportunities effectively positioning hillenbrand for long term growth in line with our communicated strategy.
We focused on defining our company culture values and working norms across the enterprise to serve the evolving needs of our global workforce supported by the creation of our company purpose.
And we also published our third annual sustainability report that I'll discuss in more detail a little later.
To expand further on these accomplishments I am pleased to announce that we achieved our communicated target of $75 million in annual run rate synergies for the Milacron integration ahead of schedule I cannot be more proud of our teams and their execution throughout this global integration. Despite historically dynamic in <unk>.
<unk> challenging operating environment over the past three years.
We are confident in the capabilities that we've developed the processes put in place as a part of the <unk> and the foundation created during this integration, including global supply management.
Global Engineering and financial shared services just to name a few.
This foundation will be a key enabler of our success in integrating future acquisitions.
As you know another key priority of ours has been growth with a focus on taking our existing capabilities for highly engineered processing equipment and solutions and expanding our footprint in end markets with attractive long term growth characteristics.
Over the past five weeks, we announced agreements to acquire <unk>, a leader in plastics recycling solutions and Linksys group, a leading global provider of process equipment and automation solutions for the food industry.
In addition, we completed a small tuck in acquisition Gobbler engineering, a specialized food extrusion company.
These strategic transactions are highly complementary to our existing products and solutions and further our strategy to build leadership positions in the end markets of recycling and food, which have attractive long term secular growth potential.
Next on July 20th we also announced the initiation of a process to explore a range of strategic alternatives for Batesville faced.
Batesville continues to be a leader in the death care industry in North America with an exceptional team that has been tireless in their efforts to deliver best in class quality innovation and service to our customers base.
Batesville is a significant part of our history and we are confident this process will determine the best path forward to benefit our associates customers and shareholders.
As we mentioned there is no specific timetable for this review, but we will update you again at the conclusion of the process.
Lee we continue to demonstrate our commitment to ESG as we published our third annual sustainability report in June .
Im excited to share with you all the progress we are making as a company leveraging our global organization.
In the report we disclosed for the first time, our scope, one and scope two emissions across our major sites and made additional disclosures regarding our efforts on the Eni and our progress on governance initiatives. The report was published as a part of hillenbrand's commitment as a signatory of the United Nations Global compact.
And includes alignment with the United Nations Sustainable development goals.
Global reporting initiative and SaaS based standards.
In that report, we also introduced our company's purpose shape, what matters for tomorrow, which will propel the organization forward in both what we will do and how we will do it as we leverage a culture of operational excellence collaboration and innovation to shape solutions that best serve our associates customers commute.
<unk> and all other stakeholders.
We were very careful and deliberate in selecting the words to define our purpose.
We are the engineers designers manufacturers and molders, who take pride in our expertise and technical capability and.
And allow the company to put the right pieces together to bring forward new solutions for our customers.
What matters, our end products affect the world they impact life across how people live work play eat travel and heal.
For tomorrow.
We continue to look at what's next as innovators in our respective industries, we will work to shape a stronger future for our world.
Embedded in our purpose as a set of four core values unifying hillenbrand's more than 10000 global associates.
When it's one.
Next partner with possibility.
And make it matter and finally drive to deliver.
Together, our purpose and core values tell the story of who we are what we stand for and where we're going as a global organization.
I am very proud of the collective efforts of all of our associates have made in helping us to create define and embed our purpose into the organization to shape what matters for tomorrow.
This is a pivotal time for hillenbrand and I'm excited for our future and confident that we are well positioned to continue to drive long term growth and value for all of our stakeholders I'll now turn the call over to Bob to provide details about our overall financial performance segments performance and outlook.
Thanks, Kim and good morning, everyone.
As a reminder, throughout my section I will be discussing our performance on a pro forma basis, which has been adjusted for the divestiture of Abel and Red valve Antero source global from the advanced process solutions segment.
We believe this provides a better assessment of our ongoing operations you will find a reconciliation of reported and pro forma results in the appendix of the earnings slide deck.
Turning to slide 10, and our third quarter, we delivered revenue of $721 million, an increase of 5% compared to the prior year or 10%, excluding the impact of foreign currency exchange. This growth was led by pricing and higher volume in our molding technology solutions and advanced process solutions segments.
Such an earlier supply chain constraints and inflation remain persistent challenges throughout the quarter and we have seen foreign currency headwinds accelerated as the dollar has near parity with the Euro I will touch on this later when I discuss our outlook for Q4 and the full year.
Adjusted EBITDA of $126 million decreased 1%, but increased 4%, excluding the impact of foreign currency exchange, while adjusted EBITDA margin of 17, 4% decreased 120 basis points, primarily due to the dilutive effect of price cost and lower volume in batesville, which more than offset operating leverage from higher volume and.
Our industrial segment.
We reported GAAP net income of $49 million or <unk> 68 per share an increase of 28% compared to the prior year.
Adjusted earnings per share of <unk> 92.
Slightly above the high end of our expectations and was <unk> <unk> higher.
Higher or 8% compared to the prior year as favorable pricing higher volume in our industrial segments and lower shares outstanding were partially offset by inflation and the impact of foreign currency exchange.
The adjusted effective tax rate in the quarter was 29, 7% a decrease of 70 basis points from the prior year.
We had cash flow from operations of $4 million in the quarter.
A decrease of $180 million year over year, primarily due to the timing of working capital related to large plastics projects.
And an increase in inventory to support higher customer demand and offset risk related to global supply chain disruptions.
In addition, we experienced supply chain delays in sourcing certain parts, which otherwise prevented the completion of some projects in the quarter.
As Kim mentioned, we saw customer delays and a few large project decisions in the quarter.
As you know these large orders are often accompanied by advance payments, which were significant factor in our exceptional performance of 170% free cash flow conversion in fiscal year 'twenty one.
The timing of working capital can be lumpy as it relates to the large projects in our <unk> product line, where we are.
Confidence in our strength of underlying fundamentals, which are enabled by the consistent deployment of the hillenbrand operating model and our working capital metrics remain at World class levels, including working capital terms of nearly 10 times and long term average free cash flow conversion of over 100%.
We expect free cash flow conversion to be lower than originally expected. This year due to timing of large orders coupled with higher than planned inventory due to supply chain disruptions.
We are now targeting approximately 6% conversion for the full year, which still resulted in a three year average conversion of over 120%.
And we remain confident in our ability to drive strong free cash flow with conversion of 100% over the long term.
Capital expenditures were $13 million in the quarter and we continue to expect full year capex to be approximately $50 million.
While supply chain begins to normalize we anticipate our capex to be in the range of two to two 5% of revenue as we continue to focus on high return investments for our businesses.
Particularly in the area of growth and innovation as well as automation to improve overall efficiency.
Our total backlog of $1 65 billion decreased 5% compared to the prior year, but was up 3%, excluding the impact of foreign currency.
Sequentially backlog was down 3%.
But flat excluding the impact of exchange rates.
Overall, our backlog remains at historically high levels, including record backlog and our MTS segment.
Now moving to segment performance on slide 11.
EPS revenue of $310 million increased 2% compared to the prior year.
Or 10%, excluding the impact of foreign currency, driven by pricing and higher volume of large plastic systems and aftermarket parts and services.
Adjusted EBITDA of $61 million decreased 3% year over year.
But increased 6%, excluding the impact of foreign currency.
Adjusted EBITDA margin of 19, 5% was down 100 basis points as operating leverage from higher volume and productivity improvements were more than offset by the dilutive margin effect of price cost.
Backlog of $1 2 billion decreased 9% compared to the prior year, but was flat excluding the impact of foreign currency.
Looking forward the pipeline remains healthy and we continue to see strong order patterns for aftermarket with another quarter of book to Bill greater than one.
Turning to molding technology solutions on slide 12.
Revenue of $207 million increased 11% year over year or 14%, excluding the impact of foreign currency as higher volume from the injection molding product lines and favorable pricing were partially offset by lower volume from the hot runner product line, which is due to the COVID-19 related shutdowns in China.
As we mentioned on our Q2 call we anticipated this shortfall.
The teams did a good job and activating plans to mitigate some of the impact in the quarter.
We continue to monitor the situation in China, but as of today, we expect to recover the shortfall during the fiscal fourth quarter.
Adjusted EBITDA of $55 million increased 1% compared to the prior year or 15%, excluding the impact of foreign currency exchange.
Adjusted EBITDA margin of 22% was flat as favorable pricing operating leverage from higher volume and productivity improvements were offset primarily by inflation and unfavorable mix.
As a reminder, injection molding equipment comes at a lower relative margin compared to hot runner equivalent.
Record backlog of $420 million was up 8% compared to the prior year or 10%, excluding the impact of foreign currency, primarily driven by an increase in injection molding and extrusion equipment.
We continue to see a solid pipeline of demand across the segment, particularly for custom molders packaging and automotive applications.
Now turning to Batesville on slide 13.
Compared to the prior year revenue of $141 million increased 2% due to price surcharges implemented this year to offset the significant increase in commodity costs.
Burial casket volume was lower compared to the prior year, primarily due to an estimated decrease in deaths associated with COVID-19, and an estimated increase in the rate at which families opted for cremation.
This performance was in line with our expectations as burial casket demand begin to normalize to pre pandemic trends.
Adjusted EBITDA of $25 million decreased 15%.
And adjusted EBITDA margin of 17, 9% declined 370 basis points due to the dilutive effect of price cost on lower volume as mentioned on last quarter's call.
We implemented an additional pricing surcharge in mid May in response to the continued rise of commodity and fuel costs, which resulted in sequential improvement in our price cost coverage.
We expect to exit the year with price fully offsetting inflation. Additionally.
Additionally, as volumes normalize the business has increased their focus on productivity improvements, which we expect to begin to see positive margin enhancements in the fourth quarter.
Turning to the balance sheet on slide 14.
Net debt at the end of the third quarter was $930 million with a net debt to adjusted EBITDA ratio of one seven times.
As of quarter end, we had liquidity of approximately $1 2 billion, including $284 million of cash on hand, and the remainder available under our current credit facilities.
Turning to capital deployment on slide 15.
As you know we've been diligent in our approach to share repurchases buying back approximately $2 6 million shares for $112 million in the third quarter, an additional 291000 shares subsequent to the quarter close for approximately $12 million.
This brings our total repurchases over the last five quarters to approximately $300 million.
As a reminder, we have $150 million remaining under our current authorization.
We continue to maintain a disciplined approach to capital allocation with a focus on maximizing long term shareholder returns through organic investments and high return M&A.
We expect the recently announced her bolt and linksys transactions will accelerate our profitable growth and drive long term value for shareholders.
We continue to anticipate <unk> will close in the fourth quarter with Wingstop closing by the end of the calendar year.
So upon close the comparable that makes us we project our pro forma net leverage to be approximately two point in times.
We are committed to deleveraging and have a proven track record of doing so.
And I expect to be well within our leverage guardrails of one 7% to two seven times by the end of next fiscal year.
Now turning to slide 17, I will conclude my prepared remarks, with an update on our outlook for our fourth quarter and full year.
As a reminder, our guidance is on a pro forma basis, which is adjusted for the divestitures of Red Bell Abel Antero source.
Our guidance does not include any impact from the announced acquisitions available that makes us based on the current expectations of their closing dates.
Additionally, our guidance does not assume the impact from any potential COVID-19 related shutdowns in the future.
Overall, we are maintaining our midpoint for the full year, adjusted EPS and narrowing the range to be $3 85 to $3 95.
From a previous range of $3 80 to $4 with unfavorable foreign currency as the primary driver of the lower top end of the range.
We now expect full year revenue growth of approximately 4% to 5% compared to our previous estimate of 4% to 6%.
Now turning to the segments, we expect the EPS revenue growth of 6% to 7% down from our previous estimate of 8% to 12% primarily due to unfavorable foreign currency impacts and continued supply chain disruptions.
We expect adjusted EBITDA margins for EPS to be the range of 19, 5% to 20%, reflecting flat to modest margin expansion year over year.
For MTS, we expect full year revenue growth of 4% to 5% up from previous estimates of 2% to 5% driven by stronger than expected performance in our injection molding product line.
We expect adjusted EBITDA margins for MTS be in the range of 23% to 28%, reflecting flat to modest margin expansion year over year.
Finally for Batesville, we expect full year revenue to be flat to up 1%, which is up from our previous estimate primarily due to higher volume.
We have increased our full year margin expectation to be 25% to 21% compared to our previous estimate of 20% to 21%.
Please review slide 17 of the earnings presentation for additional guidance assumptions.
And now I'll turn the call back over to Kim.
Thanks, Bob.
I'll end, our discussion with a final few remarks before taking questions.
As I mentioned, we will remain vigilant towards the external environment and we are prepared to respond to changes in the economy that might impact our business.
Our backlog remains healthy and we remain intensely focused on deploying the hillenbrand operating model to help our teams to effectively execute through this challenging global environment.
In accordance with our purpose shapes, what matters for Tomorrow, we will remain focused on our team innovation and expanding our capabilities to provide better solutions for our customers and meeting the needs of growing end markets. We believe the strategic actions, we have announced over the last couple of months position hillenbrand well to drive long term.
Profitable growth and shareholder value.
Finally, we will look forward to sharing more details about our vision for growth and longer term targets for hillenbrand at our Investor Day on December 15th in New York City, We hope to see you there.
We will now open the line for your questions.
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Our first question is from Daniel Moore of CJS Securities. Please proceed with your question.
Thank you and good morning, Kevin Good morning, Bob Thanks for taking the questions.
Maybe starting with the back thank you Bob let me start with backlog flat sequentially adjusting for FX.
Was there much pricing in there or is volume sort of relatively flat on an FX adjusted basis as well.
Yeah. So so yeah sequentially down, it's primarily foreign exchange and if you're looking year over year.
FX had probably about $125 million impact negative headwind on that but then the differences basically price, but sequentially, it's primarily foreign exchange.
Yes, Ben.
Adjusted for FX on a sequential basis is there much pricing and that being flat in other words, it's pretty flat as well.
Exactly that's was pretty flat so not much difference in volume and pricing sequentially.
And is it possible to quantify at all the size and relative terms of some of the wins.
Polyolefin wins that.
You mentioned to you either generated or expected to generate post quarter that got shifted out.
Yes.
So were.
We expect Q4 to be strong as Kim alluded. We did have two larger orders that we expected to come in Q3 really hit in Q4, but those are both north of $50 million each.
Got it very helpful. Okay shifting gears to Batesville you mentioned.
This change.
Change in opting to cremation is there any changes in the sort of longer term trajectory of the shift from burials to cremation or has it been pretty consistent with that.
Longer term slope.
Yes, Dan and is continuing to be consistent frankly over quite a quite a long period of time, that's been very consistent and so we did not see any shift in that this quarter.
Perfect for that.
Sure.
Yes at this point that we typically see that's the same range.
Perfect.
You mentioned I think I was taken quickly.
A new customer agreement of some sort.
Any color you can.
A light you can shine on that at all.
Well, we as as you can imagine we have a we have agreements with our large customers.
Those come up for renewal periodically and we have been able to.
Secure those four for our future partnership and those are things we are consistently deploy against all the time to make sure that we're keeping those agreements current than.
We were we were able to secure another one of those large customer agreements for a for a longer term.
Over the last quarter. So we're very pleased about that.
Got it and especially for the Batesville team I think I think that speaks to their continued service delivery, especially over in some of the challenges of last two years that customers continue to kind of re up and realign with US says that we have been doing the right things to make sure that our customers were able to take care of their customers.
Last couple of years, despite all of the challenges on global supplier.
And prices and those types of changes that we've had to work through together.
Perfect and where are we.
On a run rate right now in terms of volume relative to sort of pre pandemic levels. If you adjust for that shift to cremation, you still five 5%, 10% above or closer to where we were sort of pre pandemic.
Yes, Yes, I think I think we're I'd say right now Q3 Q4, we're closer to pre pandemic levels down so I would I would think.
Q3 performance was right in line with where we thought maybe slightly better in Q3, but really right in line with pre pandemic levels is the way I would think about it.
Got it and last for me and I'll jump back.
Q, but.
You mentioned on the injection molding side excuse me on the on the hot runner side as.
As expected some disruptions from supply chain.
Things getting better there, but there's not incremental.
Sort of disruptions or Covid disruptions in the guide.
Just maybe a little bit more on the cadence week to week quarter to quarter of how that's improving.
And what you're hearing from your customers and your ability to deliver in that challenging.
Environment. Thanks, Thanks again.
Yes, I think we have.
We've obviously had success of getting all of our associates back to work and if you are if you read that if you read the news on kind of what's going on in China relative to the.
Zero Covid policy and that type of thing we've been since the beginning of May we've been able to return our workers back to the facility generally a pretty probably pretty full status. It was the first three weeks of April that had many many facility shutdown, including us and many of our subs and <unk>.
Just around that mold Masters product line really most of our other operations in China were relatively unaffected by that so we're really talking about the mold Masters product line, we have been back at it since the beginning of May obviously with three weeks of general shutdown or continuing to and high volume demands we are really working.
Our way through.
Working our way through those orders that were delayed then and we expected part of them to come in in Q3, and another part of them to come in in Q4, we've continued to see operations able to run and we continued to see improvement in our suppliers' ability to catch up as well so.
I think there is still a bit of a log jam on Asian supply for components for various parts of our business that that has.
I would say that it's still requires a huge amount of manual effort to manage but I think we've got our arms around it and at least our ability to manage it has improved and I would say the situation itself.
Very slowly improving yeah, I would say that the actual results were right in line with our expectations, where we had a $10 million revenue impact in April we clawed about half of that back in the rest of the quarter and expect the other half.
This picked up this quarter in Q4.
That's great color I appreciate it.
And I'll jump back thanks again.
Thanks.
The next question is from Matt Summerville of D. A Davidson. Please proceed with your question.
I was hoping maybe you could put a little bit of a finer point on it.
A recurring theme in that.
Magnitude of price cost dilution youre seeing across with crude segments.
Yes sure.
Sure so.
We're pleased obviously with where.
Where we got our price cost in the quarter and just to remind you right. We entered we entered the year with the need to execute backlog, where we didn't have pricing cover covering our costs and so in Q1, we were at about 65% of coverage.
Two we got to 90, and we were expecting to get to 100% by by ending the year and so we did we did get that covered in the quarter in Q3, and we expect to cover that.
Certainly going forward. So we're pleased about what the global supply chain management team.
Our commercial teams have done on that but if you think about full year, just the dilution impact Matt for Batesville, It's probably 400 basis point impact and then on the EPS side, It's probably 200 basis points and then on the MTS lineup.
About about 60, and so when you kind of blend all of that it's about 200 basis points of margin dilution that we've had because of the price cost impact in inflation throughout the year.
That's very helpful. Thank you.
If we think about it I would imagine.
Better part of the last two years, you've had to kind of push out.
Normal.
Productivity actions that you'd be taking at batesville in order to keep up with demand and I'm sure you are running extra shifts over time et cetera, now the first sort of subsided, but what are you targeting in dollar wise for productivity improvements in that business looking out over the next 12 to 24 months to the extent that may help cushion that.
Some of the margin pressure you may see from expectedly lower volume.
Yes, so I would I would think so youre right were productivity improvements have have been delayed because of the incremental volumes, but.
In Q3 because of volumes dropping by team has been focused on now implementing some of those programs. We do have supply chain certainly impacting some of the some of the some of the impact on getting the right automation equipment, and but I would think longer term. It's we're still in that 19% to 20% range of margins go.
Forward and so we will continue to need to drive productivity and certainly evaluate our cost structure to maintain about 19% to 20%.
Got it.
Maybe just one more quick follow up just with respect to spare parts volume, obviously, improving a little bit I can meet you mentioned fits.
Fiscal Q3 book to Bill in that business still over one in an ideal world how much more parts revenue would you guys have generated year to date, I guess I'm trying to get a feel for how mix can get a look at EPS going forward.
Volume there should continue to recover I would imagine.
Yes, so I'll give you some color hopefully that will help you, but our orders in EPS I mean, those are up low low double digits and our revenue is more mid single digits in aerosol our backlog in aftermarket grew year over year about closer to $55 $60 million and then.
Even sequentially about about $7 million to $10 million and so you know in a perfect World Our book to Bill is closer to one.
We are executing that so that was part of our reason for margins being down a little bit more than what we thought.
But I would I would still kind of think we're in that kind of 30% to 35% range of aftermarket.
Parts as a percent of overall sales in Aps and we're highly focused on executing that but we need supply chain to improve and we'll be able to execute in that range.
Understood appreciate the color thanks, Bob.
The next question is from Chris Howe of Barrington Research. Please proceed with your question.
Good morning, Ken Good morning, Bob Good morning, Bryan Kraft.
Good morning, just wanted to.
Yes.
Throw a broader question to you.
B, where you take this answer.
We think about what's been the consistent theme this past quarter related to currency more specifically the strengthening of the dollar versus the euro.
As we think about that headwind moving forward with.
With the pending acquisition, which should close.
Here shortly.
How should we think about the global exposure of the overall business underneath.
Foreign currency headwinds.
As we look at demand trends.
Cross the regions.
With the acquisitions taken into consideration.
So, let's let's lump I mentioned, a couple of different buckets. So first of all the <unk> <unk> acquisition, which was the recycling systems acquisition as you can imagine.
A lot of their business does exist in Europe , who is much more progressive as it pertains to.
Recycling activities and and.
Having the appropriate inputs in order to.
Two.
Install those systems and so a lot of their business does exist there, but the underlying demand of that despite some of the challenges that we've seen in Europe . The underlying demand for recycling and systems continues to increase and even before our acquisition of <unk>.
Even before the signing of this particular target.
Our own recycling business, we're seeing a pretty substantial increase in the number of inquiries and projects that we were being invited into discussion time. So I would say that that despite some of the macro economic conditions in Europe relative to that we have continued to see strength.
And in that particular.
And market for these types of products and systems and solutions.
Relative to the length of this acquisition. They are global they are a global player. They do have they do have locations, obviously in Europe , but they also have locations in.
In the U S and we we will be taking advantage of some of our Asia footprint in order to help expand them into that market and so we believe that that despite some potential softness in Europe that we have other very attractive end markets, where we see continued growth in systems investments in.
Asia and North America.
And us working together.
We do have strengths.
And I mean, this was a really nice complement because where we very nicely complement one another geographically and from a product portfolio standpoint, and so we remain confident in our ability to execute on that that said our thesis around each of these acquisitions with the value that we could create through the hillenbrand operating model we can.
Entirely control the revenue side of this equation. So we worked with with our board.
And our team as we assess these targets and we are very focused on how we're going to be able to control the cost side of this in order to make sure that these deliver value for us. So we will be focused on both but as we made the decisions on these two targets, we're highly confident that our ability to control the cost synergy side, the best that they they makes sense.
From that perspective again as well.
Yeah.
Okay that was very helpful.
And if we shift to the MTS segment and the two lines of business for.
<unk> for injection molding can you just give a status update on that.
The maturation of their backlog have you worked off the older backlog.
To help margin a bit in the injection molding side of the business.
So they are actually still growing so that.
That business has performed well in the quarter in Q3, both on our orders and revenue standpoint, and that actually was part of our of our mix.
That happened in the quarters, but I can tell you. They grew both in volume and price in the quarter. So they are doing extremely well and price cost coverage was slightly favorable.
<unk> is performing well.
Enabled by the Hillenbrand operating model and our global supply chain management team and the fundamentals put in place and that business continues to be improving.
We're talking about business to continue to improve their margins but.
I guess that'd be the summary, I'd share with you and Chris I would add a year ago, we saw a big bubble of what we.
Right I think we technically referred to as kind of pent up demand in quarter two of last year and then we were executing that for let's call. It the continuing three three and a half quarters, but that is that that kind of that bubble of orders that came through that was lacking on the price side that has generally been executed.
And so now we are operating more on those items that were priced in accordance with with our new processes.
So I think that and the other thing that I would point to as you know that the injection molding business does have a lower margin than our hot runner business, yet you did not see.
Did not see a lot of margin degradation, even with the increased volume of <unk>.
Injection molding in the quarter. So I think that speaks really well to the improvements that we're seeing in that business that we were able to carry additional volume at a reduced margin compared to hot runners and still maintain the margin for the segment overall.
Okay.
Oh perfect answer.
Well last question as we think about <unk>.
Linksys.
Gambler engineering.
And the complementary nature of these acquisitions.
How do you foresee the integration timeline do you still have the capacity.
Sooner or other acquisitions or tuck in acquisitions, while the integration of these acquisitions is occurring or is this a pause here.
No I think we continue to look at we continue to look at potential opportunities in our pipeline and I think that it would be fair to say that those generally are smaller more tuck in related in terms of how I would describe them but.
Some of the things that we were looking at though they would be pretty close relative to those three integrations.
Cobbler engineering as a company we've worked with for quite some time as a partner so we know there.
Their company and their capabilities very well, we thought they were going to be a really great addition, they are a much smaller organization. So we anticipate that they can be integrated.
Rather quickly by the food team and concert working with their team.
And then just important to understand that we have in the in the co Purion organization itself. We have separate dedicated teams that work on recycling and work on food end markets and so we have separate teams that are working on those integrations, which allows us greater bandwidth to be able to execute.
And we feel very comfortable that through those local teams in coordination with the infrastructure, we built for milacron.
With the finance organization that global supply management organization.
The Global Engineering Center.
With the ability to reach across multiple organizations to help with the integration. We can move we can move quickly and it creates additional bandwidth because we have multiple teams we can tap into.
<unk> to get these companies integrated and moving quickly towards our synergy targets.
Okay and then my last quick question here before I go back into the queue Gambler engineering.
In acquisition.
What I'm getting at here is.
Do you think there's more of these in the funnel that perhaps you don't see the press release, you don't see the multiple disclosed that in the future.
These small tuck in acquisitions generate.
Perhaps a higher return.
On what you acquired them.
I think I mean, certainly I think there could be there are there are a lot of niche technologies. These guys had some very specific capabilities in extrusion that we were very keen to.
To be able to add into the portfolio that we offer to our food customers. So I think absolutely there could be.
There could be other tuck ins, especially given the.
Especially given the larger nature of the Linksys group acquisition that we're making there there are other places in the process, where there may be really great unique assets that we can add.
It gave more engineering very small very niche type of application, but something that we think is that as a great differentiator for us in certain markets.
But we are very open but again all of these go through a very rigorous M&A process. Every one of these regardless of the size does go through our own M&A process and our process with our board of directors to make sure that we're making.
Good sound financial decisions with appropriate returns for shareholders and then Chris just to frame. It for you purchase price was less than $13 million on the since let's.
That's why you didn't see too much press on that one but as Ken mentioned it is a great asset we think we have joined with us.
Perfect. Thanks for taking my questions.
Thanks, Chris.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question is from John <unk> of Sidoti <unk> Company. Please proceed with your question.
Thanks for taking my questions Kim and Rob can.
Tim you kind of just touched on this.
Before.
It's kind of a bigger picture question here.
You talked about an injection molding some of the jobs delays with some pent up demand from pre pandemic through the enterprise as a whole do you feel that you've kind of caught up on all those pre pandemic kind of orders that were deferred and.
Right now your customers are making purchasing decisions based on the current operating environment.
Yes, we did we do we do I mean, we think that we.
We think that for instance, the.
The increase is for instance that we've seen in the injection molding side of the business are not another round of pent up demand, we think thats good.
Good continuing demand continued products rollouts from that team continued focus on sales excellence.
So we don't feel that that is a.
We don't feel like there are any kind of.
Strange things going on in the market, we feel like Thats, a normal demand curve based on some of the investments. We've made in places we want to grow on products that we've launched.
Great and just sticking with that theme.
Should recessionary conditions.
It becomes more evident.
Which businesses would you expect to see that first and foremost needs of the order book.
And any kind of magnitude.
Well I think remember that typically where we see that is in the short cycle businesses are the first place that some of those.
That's where that the Canary.
And the coal mines. It ends up being is in that aftermarket business is where we typically see the first signs of slowdown there also the first one for out of it.
When we see and right now we see continued really robust demand in aftermarket in our businesses and so.
That has typically the short cycle businesses have typically been.
The indicator our short cycle businesses, which is our aftermarket business. Our hot runner business are feeding our feeding types of products. Those products are all seeing really good order trends.
And we have not we have not experienced those slowdowns yet.
These mega orders that we're talking about.
We continue to keep an eye on all of this we keep an eye on pipelines overtime quarter quote volumes over time, if we do that Gi geographically by product line you can imagine.
And we continue to be very diligent about monitoring it but.
That's that's what I would I would kind of point you to.
As the leading indicators. These large projects I think I think you always have to recognize that these are projects that have thousands and thousands of hours in order to create a quote from multiple suppliers in these large projects and so it is not unusual for our timelines to move around.
Round, a bet on NES depending on.
The availability of labor to conduct these quotes for whether it's for us or for other suppliers that are quoting these very large polyolefin jobs I mean everybody's fighting to have full SaaS of labor and so it's not unusual that.
That these would move around a bit and as we said we've seen some of those orders materialize already in this quarter. So we feel good even about those long cycle orders as well.
Perfect and just sticking on the same theme the cancellation risk. If there is any in any of the products would be on the shorter cycle businesses, such as the hot runner or do they face very little cancellation risk.
Hi, yes.
It would be on the parts business, but we do not see that yes, we historically haven't seen even.
Even in previous downturns, we haven't seen cancellations of any orders.
Perfect Thats comment just want them going forward.
Back to the quarter in the coming quarter how much.
<unk> was pushed and the hot runner business from <unk> to <unk>, what kind of magnitude are we talking about that yeah.
If you think about $5 million or so I would say John we picked up about half of the 10 shortfall in Q3 and the other half will pick up in Q4.
Great and you talked about a little bit of inventory build was that just to satisfy those large jobs in aps for rebuilding inventory.
Of itself for yourself and does that process continue if so.
Yes, I'd say I'd say.
We had inventory build and really kind of really all three.
Phases. So we had in raw materials web and finished goods.
A couple of things one, we obviously have higher volumes and so.
That coupled with supply chain challenges, we have been pre buying on longer lead team a longer lead time parts, obviously transportation issues with trucking availability and ports being backed up but we do have machines sitting there that are almost complete just waiting on a couple of parts primarily.
<unk>.
We can once we get those then we can we can ship.
But I would tell you our long term focus is still on working capital efficiency and particularly in the MTS business. So that'd be the obviously injection molds, but we still think we can get their turns up more and more.
Through the Hillenbrand operating model and I would say right now we're carrying right inventory a little bit higher just so we can continue to meet customer commitments, but as our supply chain continues to improve we will see that inventory level come down.
Perfect great. Thanks for taking my questions.
There are no additional questions at this time I would like to turn the call back to Kim Ryan for closing remarks.
Alright. Thank you. Thanks again, everyone for joining us on the call today, we appreciate your ownership and interest in Hillenbrand and we look forward to talking to you again in November when we will report our fiscal fourth quarter and annual results I Hope you all have a great summer and stay safe and healthy.
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Okay.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
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