Hillenbrand Inc. Q2 2023 Earnings Call
[music].
Greetings and welcome to Hillenbrand's second quarter fiscal year 2023 earnings call.
At this time, all participants are in listen only mode.
A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero from your telephone keypad.
Please note this conference is being recorded.
At this time I'll turn the conference over to Sam Mushroom, Vice President Investor Relations.
You may now begin.
Thank you operator, and good morning, everyone and welcome to Hillenbrand's conference call for our fiscal second quarter of 2023.
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 that will be referenced on today's call.
As a reminder, the divested Batesville segment is classified as discontinued operations for all periods presented in our commentary will be based on the performance of our continuing operations.
Turning to slide three I'll remind you that our comments may contain certain forward looking statements 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 organic comparisons for our segments, which exclude the impact of acquisitions divestitures and foreign currency exchange.
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 Kevin Kim.
Thank you Sam and good morning, everyone. Thank you for joining us today.
With the previously announced completion of a batesville divestiture in February we have significantly transformed our organization to be focused on delivering highly engineered mission critical industrial processing solutions end to end markets that are underpinned by long term secular growth trends.
As you know our primary focus is on the end markets of durable plastics recycling and food.
At the core of these markets is a common foundation of material processing requirement that allow us to leverage our strengths across the enterprise and where are they expanding global middle class.
And an increased focus on sustainable solutions are key factors driving demand for both increased quantity and quality of products that can be produced in our equipment.
Over the past year, we've acquired additional capabilities and by combining them with our existing core Purion technologies, we've enhanced the breadth of our unique end to end solutions, we're making good progress on integrating these acquisitions and we continue to identify opportunities to leverage our complementary technologies, leading brands and <unk>.
Deep applications expertise to provide superior benefits for our customers and long term value for our shareholders.
Now I'll provide a summary of our performance and an update on the overall demand environment.
I'm pleased with our performance this quarter as we delivered strong revenue growth and earnings per share that exceeded the high end of our guy.
I'm very proud of the way our associates have continued to execute our strategy as they navigate a dynamic macro environment.
I'm truly grateful for the hard work of our over 9000 employees around the world to shape what matters for tomorrow.
Consolidated revenue for the quarter grew 22%, primarily driven by contributions from our recent acquisition and robust organic growth in our E. P. S segment.
We continued to see strong order performance within the a T S, including record orders for aftermarket parts and service and we were encouraged by sequential order improvement within MTS, leading to another quarter of record total backlog.
I'll now spend a moment, providing more detail on what we're seeing across our end markets.
Overall, the demand pipeline remains healthy across a P S and with an M. T. S. We are seeing signs of improvement that said, we continue to experience a cautious approached by some customers at the timing of investment decisions remained extended throughout the quarter.
Let's begin with the MTR effect.
Saw a sequential improvement in orders revenue and margin in the quarter with a record level of revenue from our injection molding product line at the teams did a great job of executing products from the backlog.
As anticipated orders remained soft across the segment, particularly for our higher margin Hot runner equipment.
We continue to see customer decision delays across key end markets and geographies.
Border pipelines are improving and we do expect to return to a more normal demand environment as we move through the back half of the fiscal year.
Along with that we also expect to see a pick up in margins due to more favorable product mix I said man for hot runners improves over the next two quarters.
Now onto a T S.
Let's start where we've made almost recent investments.
What's the.
The order pipeline for new equipment is at a record level.
With strong demand outlook for North America, and Europe , particularly in the areas of baked goods and pets as well.
While we did see some customer decision delays in the quarter, we continue to focus the business on pipeline development.
The integration of links that's peerless and job well remains on track and we continue to identify opportunities with customers to sell solutions that leverage the capabilities of our extended product portfolio.
Turning to recycling with the combination of our computer in extrusion and material handling systems, and our recently acquired hairball shredding washing and grinding equipment.
We are in a unique position to provide complete plastics recycling solutions.
The exceptional receptivity from customers regarding the value. We can provide continues to outpace expectations and the pipeline of orders has grown rapidly.
We are also starting to see the scale of these customer investments increase, particularly in Europe , and North America, but we also expect to see strong demand in India, and the middle east over the quarters and years ahead.
Integration continues to progress as planned.
And finally, our core growth platform of durable plastics within our Aps segment.
As we've communicated over the past few quarters, we continue to see a strong investment cycle for polyolefin and engineering plastics.
Demand remained stable in China, and India, and the Middle East remains an attractive region as well for growth.
Particularly for large polyolefin projects.
Scale of these projects continues to increase as customers look to maximize the efficiency of their investment and this plays to our strength as a leading global provider of high output extrusion and material handling system.
We're also seeing strong demand for aftermarket parts and service, particularly in North America, which continues to indicate the critical need to support customers throughout the life of their equipment and systems.
Overall for Aps, we continue to see good demand across our key end markets and were further bolstered by our record backlog heading into the second half of the fiscal year, which gives us visibility and confidence in our outlook as Bob will discuss in more detail later on the call.
Moving forward our teams are laser focused on deploying the hillenbrand operating model to drive productivity in our operations and integrate our recent acquisition, while also aggressively managing discretionary costs over the near term.
We remain confident in the foundation, we've built to drive long term profitable growth and shareholder value creation.
I'll now turn the call over to Bob to provide a more detailed overview of our financial performance and outlook for the remainder of the year.
Thanks, Jim and good morning, everyone. Two brief reminders before I begin.
First I'll be discussing our results on a continuing operations basis, which excludes batesville.
And second I'll be making organic comparisons that exclude the impacts of acquisitions divestitures and foreign currency exchange.
Now turning to our consolidated performance on slide six we delivered revenue of $691 million, an increase of 22% compared to the prior year, primarily due to acquisitions and higher aftermarket parts and service revenue.
On an organic basis revenue increased 9% year over year led by 11% organic growth within our Mds segment.
Adjusted EBITDA of $109 million increased 8% or 3% organically as favorable pricing and productivity improvements were partially offset by cost inflation.
Yeah.
Adjusted EBITDA margin of 15, 7% decreased 200 basis points, primarily due to unfavorable product mix and the dilutive effect of the acquisitions.
As we've previously discussed the recent acquisitions currently operate with lower relative margins. However, we do expect to bring these margins in line with historical ETS margins over the next few years as we drive synergies and productivity.
Appointment of the Hillenbrand operating model.
We reported GAAP net income from continuing operations of $24 million or <unk> 33 per share.
Adjusted earnings per share of <unk> 74 increased.
Increased <unk>.
And 14% compared to the prior year.
Primarily due to pricing and productivity improvements.
Higher EPS volume.
The impact of acquisitions and fewer shares outstanding.
This was partially offset by inflation.
Unfavorable foreign currency exchange.
And higher interest expense.
The adjusted effective tax rate in the quarter was 33, 5%.
We anticipate our full year tax rate to be approximately 31%, which is at the high end of our previously provided range, primarily due to unfavorable geographic mix.
We generated cash flow from operations of $50 million in the quarter up approximately $65 million from the prior year, primarily due to favorable timing of working capital.
Capital expenditures were $17 million in the quarter.
We returned approximately $50 million to shareholders through our quarterly dividend.
As the supply chain environment Normalizes, we continue to expect an improvement in our working capital profile.
Particularly through lower inventory.
And through the reduction of Unbilled receivables related to large projects.
We also anticipate the higher order volume will generate an increase in customer advances in the back half of the year.
Leading to stronger cash flow in the second half compared to the first half.
We maintain our expectation that full year cash conversion will be in the range of 80% to 85% for fiscal 2023.
While on a longer term target remains at approximately 100%.
Now moving to segment performance, starting with EPS on slide seven.
EPS revenue of $441 million increased 37% compared to the prior year driven by acquisitions.
Higher aftermarket parts and service revenue.
Favorable pricing.
Organic revenue increased 11% year over year.
Adjusted EBITDA of $73 million increased 12% year over year or 2% organically.
Favorable pricing higher volume and productivity improvements were partially offset by cost inflation and growth investments.
Adjusted EBITDA margin of 17% decreased 370 basis points, primarily due to the dilutive effect of the acquisitions.
And an increase in growth investments.
Margins for the acquisitions were a bit lower in the quarter than anticipated primarily due to customer delays negatively impacting volume.
As I mentioned earlier, we still expect to improve these margins towards historical levels over the next few years.
Yeah.
Backlog of $1 six $7 billion increased 30% compared to the prior year or 13% on an organic basis, primarily driven by increased orders for large plastic systems and record orders for aftermarket parts and service.
As Kim mentioned, we are pleased with the robust pipelines in our key growth platforms of durable plastics recycling and food, which we expect to translate into higher growth in the second half of the year.
Turning to MTS on slide eight.
Revenue of $260 million increased 4% year over year or 7% organically as an increase in injection molding equipment.
Well pricing and higher aftermarket parts and service was partially offset by a decrease in heartland requirement, which we anticipated coming into the quarter.
Adjusted EBITDA of $48 million decreased 6% or 2% organically and adjusted EBITDA margin of 18, 2% decreased 190 basis points.
Primarily due to the elevated relative volume of injection molding equipment, which as we've discussed it comes at a lower relative margin when compared to hot runners.
As Kim mentioned, we expect this mix to normalize in the second half of the year, which will result in overall improvement in margins for the segment.
Backlog of $298 million decreased 29% compared to the prior year, primarily due to the execution of existing backlog and more orders for injection molding equipment.
We delivered record revenue from our injection molding product line in the quarter, which is a testament to the team's relentless focus on execution.
The order softness we saw throughout the quarter was in line with our expectations and we are seeing pipelines improved across most applications and geographies.
We expect to see orders continue to pick up as we work through the remainder of the second half of the fiscal year.
Turning to the balance sheet on slide nine.
Net debt at the end of the quarter was just under $1 billion and our net debt to pro forma adjusted EBITDA ratio was 2.2.
At quarter end, we had liquidity of approximately $1 $1 billion, including $350 million in cash on hand, and the remainder available under our revolving credit facility.
I'd like to highlight that in June we expect to make a tax payment related to the batesville sale of approximately $150 million.
Including this tax payment our net leverage ratio will be approximately two five times as of the end of the second quarter, which is back within our targeted range of one seven to $2 seven.
Turning to slide 10, as many of you know we have a strong track record of deleveraging following acquisitions and.
And we expect to continue this track record as we move forward.
Maintaining a disciplined capital deployment strategy that is focused on profitable growth and shareholder value creation.
As we've consistently communicated our capital deployment framework is based around four key priorities driving profitable growth through attractive organic.
And inorganic investment opportunities.
Returning cash to shareholders through an attractive dividend policy and opportunistic share repurchases and maintaining.
Any inappropriate leverage profile with a target net leverage of one seven to two points of it.
As we make progress integrating our recent acquisitions, we continue to evaluate potential strategic acquisitions that strengthen our capabilities in key end markets accelerate our profitable growth strategy and those that will provide a strong return to shareholders over the long term.
Now moving to slide 12.
As we enter the second half of the fiscal year, we are updating our guidance based on our performance through the first half as well as what we see improved demand and operating environment.
Our guidance now assumes slightly increased expected revenue of approximately 2.81 billion to $2 $86 billion for the year.
Previously $2 77 to $2 $86 billion.
We are maintaining the midpoint of our adjusted EPS range, while narrowing slightly to $3 30 to $3 50 per share from a previous range of $3 25.
The $3 55 per share.
Now turning to the segments.
For Acs, we're refining our expected annual revenue range to be one eight to $1 eight 3 billion previously $1 79 to $1 $84 billion.
Our assumption for underlying organic growth remained strong at approximately 10% to 12%.
We are lowering our expectations for adjusted EBITDA margin to be in the range of 18, 5% to 19% previously, 19%, 20%, primarily due to unfavorable product mix and the dilutive effect of price cost has remained more elevated than anticipated.
This guidance reflects underlying organic margin expansion of 40 to 90 basis points.
For NCS, we are slightly raising our expected annual revenue range to be $1 1 billion to one final $3 billion.
Previously $980 million to $1 $2 billion.
We are maintaining our previous guidance for EBITDA margin in the range of 19% to 20% based on the expected product mix in the second half of the year.
With the ongoing macro uncertainty, we are providing Q3 guidance range for adjusted EPS.
Which we expect to be 88 to 94, which reflects year over year growth on a continuing operations basis of 28% to 36% and strong sequential improvements in both segments.
Please review slide 12 for additional guidance assumptions.
With that I'll turn the call back over to Kevin.
Thanks, Bob before taking questions I'll end our presentation. This morning with a few final remarks.
Since I became CEO nearly 18 months ago, we've significantly transformed hillenbrand into a pure play global industrial leader and our entire organization remains energized and excited about the opportunities that lie ahead.
As we communicated at our Investor day in December our focus is to drive profitable growth and create long term shareholder value through four key tenets.
First leveraging our leading brands with strong competitive positions in large and growing end markets.
Second enhancing our growth by leveraging our large installed base to drive profitable aftermarket expansion and by expanding our capabilities through strategic M&A.
Third utilizing the hillenbrand operating model to drive sustained operational improvements productivity and synergies and finally by deploying capital towards high return opportunities and returning cash to shareholders through dividends and opportunistic share repurchase.
Finally, I'm pleased to highlight that we will publish our fourth annual sustainability report later this month and we look forward to sharing our continued progress with you.
Now we'll open the line for questions.
Thank you well now be conducting a question and answer session.
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One moment please poll for questions. Thank you.
Our first question is from the line of Daniel Moore with CJS Securities. Please proceed with your questions.
Thank you good morning, Tim Good morning, Bob Thanks for taking the questions and the detail.
Dan Good morning, Dan.
Start with a P S a which remains remarkably strong you know, particularly at this point in quote unquote the cycle I'm, obviously, you've seen a nice pick up in food.
Et cetera.
But you know in terms of polyolefin.
When when should we start to expect backlog to tick lower and you know would that in fact could be a good thing as lead times are maybe a bit stretched out at this point.
Yeah, I would say we continue to see as we continue to see a strong pipeline there and I think that as you.
Just continue to see some of those macro trends around.
The investments we've seen in China over the last several years now youre seeing investments in India as they try and address their own domestic needs, but also some of the transfer of manufacturing that has moved into those regions you see the middle East investing.
These typically move in regional swaps.
And we just continue to see the demand for that for that that product are in.
In these regions to take advantage of natural resources in each of the regions and be able to address market demands for those in a variety of end markets and that growing global Middle class is the key driver all around the world for the continued demand in these products to your point and I do think that you know you know we are.
Or at the largest backlog we've ever had lead times are.
Certainly very extended and and it takes a lot of extra touches to manage a backlog. This bank. So over time, we would like to see that move down to a more optimal level that allows us to Uh huh.
More efficient touches of the backlog, but right now you know, we're responding to customer demand and and or.
Well they have so many customers that depend on us for their jobs all around the world in terms of helping them not just on sales, but also in service, which also did very well in the quarter and that's been a part of the building backlog.
Yeah, Dan and maybe maybe it wasn't.
What I would add right as Kim mentioned the operation on the operations.
We continue to focus on lead time reductions in the application of the Hillenbrand operating model is proven to be successful in Etfs and so we still see obviously pipeline and strong demand, but we continue to push more out the door.
Yeah.
Perfect I'll switch gears.
Maybe until the need as you have in the past, but between injection molding, which generally has kind of longer lead times versus hot runners were quick turn business and you know when hot runner demand. It usually turns when it turns it turns quickly so.
I'll talk about sequential order activity, thus far in Q3 and your confidence in that.
The sustainability of that sequential improvement is as we get into the back half of the year, particularly on the hot runner side.
Yeah, So Dan it's still early in the month and so we're still closing the books.
But I would say what we've seen so far in April continue to see a strong pipeline.
Customer decision.
And the timing associated with making those decisions are still fluid, but I'd tell you there's really been no surprises in the month, we did have sequential improvement in Q2 versus Q1, as we had in our prepared remarks, and so about a 6%.
Improvement in orders in the quarter versus versus Q1, and again strong pipelines, but customer orders are just are just fluid right. Now so we feel encouraged about the activity, but just being being.
I guess I should say, we're recognizing the fluidity of ultimate customer decisions in our in our guidance.
And one more and I'll jump back, but just a follow up there overall it sounds like you you you know the expectation is that orders will pick up and the M. T. S side in the back half of the year, maybe talk about some of the guideposts and signposts that you have if it's just you know your current pipeline are in discussion.
With customers.
Give me confidence there and when do we need to see orders for injection molding pick back up to to generate the kind of maybe longer term mid single digit growth that AR is the expectation over the longer term as we think about fiscal 'twenty four thanks again.
Yeah. So when do we need to see that I'm the lead times in the injection molding side of the business or it can be anywhere from six to 12 to 15 months, depending on the size of the project and some of the.
<unk> said that we are seeing some of that fluidity and it's kind of those mid term projects I think nine to 12 months and so.
You know we is that we certainly are expecting that those projects will start breaking loose here in the next.
You know in the next quarter or so is what we're anticipating in the next quarter or two.
So those are the watch signs we're watching in the injection molding side of the business.
As you mentioned them on the hot runner side of the business that has a much shorter lead time.
What is what we're really seeing is a lot of activity relative to discussions with customers, particularly in certain geographies around projects that are starting up but again a lot of these folks have not been able to work collaboratively.
In a normal sales cycle until just the last few months since now too.
To a certain degree we're starting we're starting those processes and sometimes those are those new lines, which is what we're seeing specifically in India.
Those are new lines that are starting up.
We're seeing a little bit longer lead time, as we do that preparations and some of the design work.
For those types of jobs and so they are typically the sales cycle on those is call. It a quarter typically a quarter maybe on a much larger multiline projects, maybe as much as six months, but.
That is typically a much shorter term business for us and so you know.
We will get that turned around.
We will get those revenues and if if we start seeing the pickup in decision timing then we will start to we'll start to experience that quickly.
The financials.
Really helpful to get some questions around recycling and food, but I'll jump back in queue. If they don't cover them. Thank you very much okay. Thanks, Dan.
Our next question is from the line of pets Overfelt with D. A Davidson. Please proceed with your question.
Couple of questions you mentioned in your prepared remarks that you know.
The acquisition contributions may be a bit less versus expectations on a pro forma basis, what did organic growth look like for the acquisitions in the quarter and can you put a finer point around what might be driving some of the delays in volumes that you highlighted particularly on the food side of the business.
Yeah.
I'll, let I'll let.
Bob kind of look through and see what we've got a handle that we can reference in our in the in the pro form I'm not sure. If we have anything specifically handy on that topic, but we can certainly get back to you on that relative to what we saw in demand. It's really frankly, just a little bit of the slowdown that we saw in any market.
So you know what.
They'd customer decisions are elongated decision timelines for some of these are for some of these projects.
You know remember that we've acquired businesses that are now linksys businesses, specifically, our smaller businesses. They they were not closing on quarters of driving for quarterly performance in the same way because they were not publicly held them. They were smaller businesses and so we're really working with them.
On their processes are being really clear on exactly how what the timing is going to be on closes and so I think there was probably some.
Some optimism on our part on on kind of.
How how quickly some of these orders were club would close or or exactly how the timing would work, but I think we're continuing to get better every month in terms of the processes that we have around our controls and our estimates in these new businesses.
We continue I think the most important thing is do we see a robust pipeline are we seeing.
Interest are we seeing good traction in terms of being able to add different parts of the portfolio into the discussions that we're having with customers on these lines and all of those all of those are really positive signs in terms of the businesses to work collaboratively together and offer all of the value of the full portfolio now.
As opposed to just pieces and parts in individual.
Pieces of equipment and those signs are all really really positive.
And so we're really bringing that systems approach them into the businesses and and.
Again, making really good progress on that the timing of quarterly close the improving the accuracy of the estimates that theyre, making as businesses.
All of those things are we're still early days were in the first demand.
Owning these businesses so yes.
We're pleased to date, but we will have some you know we'll just have some some time that it's going to take us to make sure that everything runs exactly like it does in the main base business.
Yeah, and then Matt.
Matt just the way I would think about just the acquisitions.
You know I would say that.
The acquisitions in total probably underperformed in the quarter topline probably call it $6 million to $8 million in revenue really again, just based on timing of customer decisions and so we still see strong pipelines moving forward, but that's the way I'd think about the M&A piece.
Got it and then just wanted to talk a moment about price I think EPS was up 11 organic MTS up seven if I have my numbers right how much of that growth is being driven by price versus volume.
Okay.
Uh huh.
Bear with me here.
It's probably about 4% on price.
In the quarter.
Matt.
Got it.
Hum kind of to a little bit what you were talking about during the last quarter.
Quick round of questions.
With respect to MTS, you're talking about the hot runner business, starting to do better even though it doesn't sound like you have orders necessarily intend to kind of dictate that cadence. So I guess I'm curious as to what gives you the confidence that you know hot runners might be improving.
How that informs you about the macro environment, what markets and geographies might be driving that pretty guys. Thank you.
So the markets, where we will see that as we will we are expecting we will see a pickup.
Sorry, I'm proud of my throat. This morning, we're expecting that we'll see some pickup in our normal markets like.
Like China.
[laughter], which has been you know as you know for the Hot runner business. That's a that's a very prevalent market for us and has been one that has been really good.
<unk> by some of that.
Some of the activities over the last.
Over the last several quarters, where travel was was not very.
It just wasn't possible in a number of quarters and so we're really restarting as we mentioned in the last in last quarter's call, where we were really just restarting those conversations.
So it is about pipeline.
And in China, and really getting those projects.
Cross the finish line from a decision standpoint, I would say that we are also seeing a lot of interest in India as continued suppliers and move into that Indian market, and if and if I would say kind of do a heat map of.
Today versus where we see these markets over the next 12 months all of our resources on the ground really give us.
Confidence that there.
There is still kind of.
It was slow in the decision making process right now that their expectations over the next 12 months and the indications on our quoting pipeline would indicate that we would expect to see a we would expect to see improvement and remember we play in a lot of a lot of different end markets automotive consumer goods packaging medical electronics and so there are.
A lot of places to be paying attention to trends that we will be opportunistic for us to be chasing in those markets.
Hopefully that helps clarify it won't matter if not Matt.
Yes, thanks, so much.
Yeah.
I think you if you'd like to ask a question today. Please press star one from your telephone keypad. The next question is from the line of John Friendship with Sidoti and company. Please proceed with your question.
Good morning, everyone and thanks for taking the questions.
It seems like everyone's.
Rightfully focused on the opportunity pipeline and possibly the duration of it I myself am I'm surprised how strong its been in light of macroeconomic conditions.
But you suggested that it has sustainability not only into the current quarter, but maybe beyond that when you think about the opportunity pipeline. How long do you expect to see at this elevated level, given what youre holding right now.
In terms are you speaking on more on the API side, or the MTR side or or kind of roughly.
So broadly okay, alright, so let me, let me kind of address it a couple of things in a couple of chunks you maybe think about so let's talk about the base plastics business that we have in both our Aps and MTS segment.
We've continued to see them.
We continue to see in various geographies those investments continue and as we've mentioned we've continued to see China stay very stable at high relative to for instance, where it was several years ago and there have been a lot of investments. There. We are still working on projects that have been in flight for frankly, a couple of years now and we're just.
Stable to get in and do service work and start doing commissioning at sites and those types of things to bring these.
These long these longtime projects to fruition and to startup and so we expect that we'll continue to we'll continue to see revenues in.
Those areas as we continue to complete projects, but the demand there remains high we've also seen incremental activity in terms of our conversations with customers who are investing in India and much of that at India growth is driven by frankly, a lot of people wanting to make sure that they have another Asia footprint.
<unk> does not specifically in China, and so there are investment opportunities that are coming in India.
We're also seeing investments again in the middle East and all of those have an initial investment and and capital, but then those will be followed up by investments in <unk>.
And the service and in maintaining those lines. So those are so I do expect that to be a longer duration. I mean once these projects start you know they are you know 24 to 30 months.
During the during the build process and then when they commissioned and come online and you've got parts and service that will come as a result of those investments.
So those are pretty long in duration, when we think about some of the demand that we're seeing in other end markets like recycling I expect that to just increase.
I don't I don't think that's a cycle per se right now that's just our hyper investment all around the world and people who realize that this is something that is going to be a it's going to be absolutely required problem. Many of these major manufacturers to have some type of capabilities for recycling, whether it's just you know.
Post industrial use and what's going on in their own facilities or them elongated and their own their.
Their own reach in vertical integration by by becoming more capable of producing recycling or the or a different types of products biopolymers. Those types of things. So that is going to be just a hyper investment cycle now primarily were seeing it in North America and Europe right now, but we absolutely expect that that will continue.
To have increased investments in Asia, and <unk> and also the middle East over time as people continue to need to have a way to deal with.
Plastic materials and be able to reuse them so that recycling.
That recycling area I don't think that's a cycle for the for the foreseeable future that is just key investments that are going to be happening and then on the food side as this growing global Middle class again, we're seeing expansion of capacity to address this growing global middle class I mean needs worldwide. These key markets were so important to.
Not not just because we had capabilities that could be extended into these markets, but because of the markets themselves were attractive over the long term and have long term secular investment in growth trends that we believe will be a very advantageous for for our capabilities to address them and for our shareholders.
Two.
Take advantage of these growing markets.
Perfect.
I guess just.
A little bit more granular of a question.
The aftermarket business was relatively good was that a function of low inventories at the customer levels new.
New channels that you're addressing or maybe something on the service mix can you just talk a little bit about what's going on in the aftermarket.
Yeah, I would say I will let Bob address some of I'll just hit it kind of a high level I think there has been some pent up demand and I'm not I wouldn't say that all of the increase that we've seen as pent up demand I will certainly say that the increment of service that has been being done which actually affected our margins a bit and Aps.
Because there is a there's a decent differential between parts and service margins.
So we did see.
Great volume and in a lot of utilization of our service team, but a lot of that was addressing some service work that needed to be done and some of that comes at lower margins than for instance, some of the proprietary parts that we sell so so.
So that aftermarket business, we've had a large capital investment cycle over the last several years, so and we've been calling for a number of quarters that one of the things that we expected to see was an increase in our aftermarket business as a result of those capital investments because they hit time periods, where wear parts and where.
Standard maintenance or debottlenecking or modernization all of which we do.
You know as a part of our relationship ongoing relationship with customers. It's just time.
From those original capital investments to for customers to be addressing some of those types of needs.
Our global service team that has just done a spectacular job of being there to address those needs for customers all around the world.
Yes, the other thing I would add John is both businesses saw a book to bill over over one and so we're seeing it across the entire portfolio and there is some pricing in there as well and as Kim mentioned.
Today and in the past right, it's been a strategic focus for us to grow that aftermarket business and so we're seeing it in the results in the quarter.
Yeah.
But I guess one last question regarding the reduction in the EBITDA margins for Aps.
How how much of it is that mix in aftermarket and what is the other.
Important factor, we should be thinking about the lower margin profile and EPS now versus say three months ago.
Yeah, there's probably it's probably a third of that of that reduction relates to mix. The other pieces that that we had that's putting pressure on it would be the price cost that we saw in Q2, we're still above 100% for the quarter and for the year, but just a little bit more pressure on the pricing side.
And then and then there is some incremental investments we made in battery and food are really just rounding out the drop in the margins John .
Hey, guys. Thanks for taking me.
Alright, thanks for taking my questions.
Thanks, John .
Okay.
Thank you at this time I'll now turn the floor back to management for further remarks.
Great. Thanks again, everyone for joining us on the call today, we appreciate your ownership and your interest in Hillenbrand and our transformation. We look forward to talking to you again in August when we will report our fiscal third quarter results have a great day. Thank you.
This will conclude today's conference you may disconnect your lines at this time and thank you for your participation.