Q3 2023 Hillenbrand Inc Earnings Call

Good day, ladies and gentlemen, and welcome to the Hillenbrand third quarter fiscal year 2023 earnings call.

Our hosts for todays call is Sam mindset.

<unk> of Investor Relations.

At this time all participants are in a listen only mode.

We will conduct a question and answer session.

I would now like to turn the call over to your host Sam you may begin.

Thank you operator, and good morning, everyone welcome to Hillenbrand's conference call for our fiscal third quarter of 2023.

Im joined by our President and CEO , Kim Ryan and our senior Vice President and CFO , Bob in Hamburg and.

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.

Turning to slide three and 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 organic comparisons for our segments, which exclude the impact of acquisitions divestitures and foreign currency exchange.

Courage 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 affect our actual results with that I will turn the call over to Ken.

Thanks, Sam and good morning, everyone. Thank you for joining us on today's call I'd like to start by touching on our recently announced acquisition of the shank food in performance materials business or Fps, which we expect to close later this quarter. This transaction builds upon the momentum of our linksys Peerless and <unk>.

Both acquisitions as we executed our profitable growth strategy to transform hillenbrand into a pure play global industrial company.

As a reminder, with these acquisitions and the divestiture of Batesville that we completed in February we've transformed our portfolio from having roughly 20% of our revenues generated from the second one really declining death care end market can now anticipating nearly 30% of our combined revenues to be in the higher growth less cyclical end.

Our food pharma and recycling.

These end markets are supported by long term macro growth demands and our improved scale allows us to leverage our global engineering and service capabilities, along with our global footprint and scalable foundation to drive profitable growth.

I'm excited by the opportunity this acquisition will create by enabling us to provide more comprehensive value proposition to our customers to create enhanced opportunities for our associates to share best practices and drive scale benefits across functions like engineering manufacturing and procurement and finally to create long term.

Shareholder value through our combined portfolio of leading brands and technologies with an expanded presence in higher growth less cyclical end markets.

We are on track to close the transaction this quarter and the teams are diligently planning the integration process that we can hit the ground running on day, one we look forward to providing an update at closing.

Turning to the next slide I'll now touch on a few key highlights from our fiscal third quarter.

Overall, we executed well in the quarter exceeding our expectations for margins and earnings per share as our teams did an excellent job managing spend and driving productivity.

Consolidated revenue grew 24% driven by strong performance from our acquisitions and robust organic performance at 14% and our Aps segment.

With continued strength in our aftermarket parts and service business, which offset continued softness within our MTS segment, which I'll discuss further in a moment.

We also delivered adjusted earnings per share growth of 36% and generated free cash flow conversion of over 110% in the quarter.

I'm pleased with the progress, we're making on our integration and the success, we've seen creating enhanced solutions for our customers with two multimillion dollar system orders won in the quarter for alternative protein snack applications, which neither <unk> or link says what has been able to win alone.

The teams are excited about the opportunity to create even further value through the addition of FPL.

Finally at the end of May we published our fourth annual sustainability report.

Showcasing our purpose shaped what matters for tomorrow.

In the report we furthered our commitment to transparency by publishing our double materiality assessment, which reassess the priorities of our internal and external stakeholders. Following the acquisitions, we made in 2022.

We also disclosed our scope three emissions water usage and approach towards reducing our emissions.

Very proud of our teams for the significant progress. We've made most recently reflected in hillenbrand being named a finalist in the writers responsible business awards for the launch and communication of our purpose.

Now I'll provide a high level overview of the dynamics, we're seeing across our segments.

Starting with MTF, we continued to see softness in orders across the segment.

While orders and revenue for hot runners that improved sequentially. We continued to see elongated customer decision processes across most end markets and geographies, particularly in China, where we're seeing extended weakness in customer orders driven by ongoing uncertainty within China's economy, as well as customers pausing to reevaluate their own production.

Footprint within the broader region.

For injection molding products orders were relatively stable on a sequential basis, but if not rebounded in the timeframe. We initially anticipated we continue to be cautious about the outlook for MTS and remain focused on managing cost and driving productivity to maintain margin performance.

Now turning to Aps, starting with durable plastics.

While we were impacted by customers delaying decisions on a few large projects in the quarter. We continued to see a healthy pipeline of projects for both polyolefin and engineering plastics in India, the middle East and China.

The scale of these projects has continued to increase as customers look to maximize the efficiency of their investment and this plays into our strength as a leading global provider of highly engineered high output extrusion and material handling systems.

We've also continued to see strong demand for aftermarket parts and service in this segment, which reflects the strength of our installed base and the enduring value proposition, we bring to customers throughout the life of their equipment and systems.

We delivered double digit year over year organic growth in the Aps aftermarket revenue this quarter and our aftermarket book to Bill ratio remained above one now for the 11th consecutive quarter.

Turning to recycling as a reminder, through the combination of our <unk> extrusion and material handling systems and the Hairballs shredding, Washington grinding equipment, we can offer a unique value proposition to customers.

Through our complete plastics recycling solutions.

While this represents a small part of our portfolio today, we believe we will see significant growth over the next few years as the number of projects as well as the scale and complexity of the systems required to process the recycled material increases.

Now to food and pharma.

We saw strong performance in the quarter with revenue improving nearly 20% sequentially and book to Bill above one with robust demand for equipment and systems and applications, such as baked goods and other process food, including pet foods snacks and treats we saw strength across North America, Europe , and Latin America and were.

Confident in the outlook for this less cyclical higher growth part of our business, which is bolstered by our ability to create enhanced value with our more comprehensive product portfolio.

As a reminder, in fiscal 2020 to these end markets represented approximately 3% of consolidated revenues through acquisitions at Linksys Peerless in Gobbler, we've increased our scale to approximately 15% of total revenues and closing the acquisition of SPM will bring us to nearly 25% of.

Total company revenues.

Overall, we remain confident in our strong brands and leading technologies and we believe the portfolio actions. We've taken have strengthened our position within and markets that can balance the cyclicality of our existing plastics business, while still leveraging our core capabilities around material processing and systems engineering.

While the ongoing macroeconomic uncertainty is causing delays in customer decisions. We remain focused on executing our strong backlog driving continuous improvement in our operations through the hol.

Managing discretionary costs and executing our integration plans to achieve both growth and synergies.

I'll now turn the call over to Bob to provide a more detailed overview of our financial performance and outlook for the fourth quarter.

Thanks, Kim and good morning, everyone.

Turning to our consolidated performance on slide six.

We delivered revenue of $717 million, an increase of 24% compared to the prior year or 5% on an organic basis.

Strong organic growth within our Aps segment of 14% was partially offset by lower volumes within our MTS segment.

Adjusted EBITDA of $126 million increased 25% or 7% organically as pricing and productivity improvements and higher EPS volumes were partially offset by cost inflation and more MTS volume.

Adjusted EBITDA margin of 17, 6% improved 20 basis points.

We reported GAAP net income from continuing operations of $44 million or.

Or <unk> 60 per share up from 42 in the prior year.

Adjusted earnings per share of <unk> 95.

Increased 25 or.

We're 36% compared to the prior year, primarily due to pricing and productivity improvements the impact of acquisitions and.

The adjusted effective tax rate in the quarter was 36%.

We anticipate full year tax rate to be approximately 29%, which is favorable to our previous projection primarily due to a strategic tax initiatives and it takes effect in the fourth quarter.

We generated cash flow from operations of $89 million in the quarter up approximately $104 million from the prior year, primarily due to favorable timing of working capital and higher earnings.

Expenditures were $14 million in the quarter, and we returned approximately $50 million to shareholders through our quarterly dividend.

We were pleased with our cash performance in the quarter as teams did an excellent job executing reductions in inventory and receivables.

We maintain our expectation that full year cash conversion will be in the range of 80% to 85% for fiscal 2023.

Longer term target remains at approximately 100%.

As in line with historical Aps margins over the next few years as we drive synergies and productivity to the appointment of the Hillenbrand operating model.

Backlog of $1.6 billion increased 31% compared to the prior year or 7% on an organic basis, primarily driven by demand for large plastic systems and aftermarket parts and service.

Sequentially backlog was down 4%, primarily due to the delay of several large orders as Ken mentioned earlier.

However, we see strong demand in our food business.

Particularly within our linksys brands and continued strength and our aftermarket business.

Turning to empty us on slide eight.

Revenue of $252 million decreased to 7% year over year or 6% organically as a decrease in injection molding and hotliner equipment sales were partially offset by higher aftermarket parts and service revenue and favorable pricing.

Adjusted EBITDA of $51 million decreased 7% or 5% on organic basis.

At the end of the quarter was $1.5 billion in our net debt to pro forma adjusted EBITDA ratio was two three times.

At quarter, and we have liquidity of approximately $1.08 billion, including $291 million in cash on hand, and the remainder available under a revolving credit facility.

Is it consistently communicated R capital appointment framework is based around four key priorities.

First driving profitable growth through attractive organic investments.

Second enhancing our growth through strategic M&A.

Third returning cash to shareholders through our attractive dividend policy and opportunistic share repurchases.

And finally, maintaining an inappropriate leverage profile with a targeted net leverage range of 17227 times.

As we announced in May we believe the acquisition of SPM will bring significant street, Cedric and financial benefits to hillenbrand.

It clearly aligns with our profitable growth strategy, improving the end market exposure of our business with leading positions and the attractive food and market.

<unk> generates roughly 65% of the revenue with meal or half of their food revenue coming from pet food, which we believe will be attractive growth area for us going forward.

While the margins of SPM will initially be dilutive. We are confident we can successfully execute integration of SPM alongside linksys unfair less to drive cinergy realisation and achieved margin expansion towards historical Aps segment levels over the next few years.

We plan to fund this acquisition for our Vulvic crest facility, and our recently announced $185 million term loan.

Following the closing of this transaction, which is expected later this quarter, we anticipate our queue for pro forma net leverage we approximately three two times.

Looking ahead will be prioritizing our cash flows towards debt reduction with a target to be below 2.7, net leverage within 15 months pulse close as we communicated at the time of the deal announcement.

Now moving to our outlook on slide 11.

We entered the final quarter of the year, we're narrowing our guidance based on our performance year to date.

Well as what we see in the current demand and operating environment.

Given that we have not yet closed the acquisition of SPM, we are not incorporating any impact into our guidance and we would not expect material impact to our adjusted earnings per share from the acquisition at this time.

Starting with a total hillenbrand our guidance now assumes total annual revenue of approximately 2782 $281 billion down from our previous range of $2 81228 $6 billion.

Primarily due to the delay in customer orders, we experienced in Aps impacting our revenue recognition as well as the ongoing delight in orders and Mcs.

Given favorable corporate items, including interest and tax we are raising the midpoint of adjusted earnings per share outlook.

With our full year range now expected to be $3.40 to $3 50 <unk>.

$3.50.

As I mentioned earlier, we expect our adjusted effective tax rates to be approximately 29% for the full year.

Now turning to the segments.

Yes, we now expect annual revenue to be in the range of $178 billion to $1.8 billion previously 1818 $3 billion.

While organic growth slightly lower due to the order delays and large plastic projects. It still remains strong at high single digit growth and.

And we expect slightly better performance and our recently acquired businesses.

We now expect adjusted EBITDA margin to be $19, 2% to 19.3%.

Higher than our previous range of $18, 5% to 19%.

Primarily due to better performance from our acquisitions.

Organic margins are expected to be up approximately 60 to 70 basis points over the prior year.

Four Mcs annual revenue is now expected to be $1 billion to $1.1 billion. Previously 1.01 to one final $3 billion as customer decision timing has been slower than previously anticipated, particularly in China, where macro headwinds have continued to impact the region.

Our guidance range for adjusted EBITDA margin is now $18, 7% to 19% slightly below the low end of our previous range of 19% to 20%.

Primarily due to the lower than expected volume.

We continued to deploy hillenbrand operating model drive that operating efficiencies and evaluate additional cost savings vaccines to help mitigate the ongoing macro softness.

Please review slide 11 for additional guidance assumptions with that I'll turn the call back over to count.

Thanks, Bob before taking questions I'll end our presentation. This morning with a few final remarks.

As we navigate the ongoing macroeconomic uncertainty I remain confident in the actions we have taken the physician hillenbrand very long term profitable growth.

We remained laser focused on managing what we can control and driving shareholder value through our leading brands with strong competitive positions in large and market supported by long term growth trends.

There are large installed base that supports profitable aftermarket expansion and by capitalizing upon enhanced capabilities, we've achieved through our strategic M&A.

By utilizing the hillenbrand operating model to drive sustained operational performance.

Productivity and synergies and by deploying our cash flows towards deleveraging high return growth opportunities and returning capital to shareholders, but that will open the lines for questions.

We will now conduct a question and answer session.

If you would like to ask a question at this time.

Please press star.

One on your telephone keypad.

This is indicating something.

More more akin to a recession is it's not high because we are continuing to see a lot of activity in the pipeline. We are not seeing those projects cancel we're continuing to see feed studies, which are kind of feasibility studies that we do with companies early in their process. So there was if you look back to you.

Kind of the most recent big downturn, which would have been 0809.

<unk> were coming off the list.

Studies, we're getting halted.

There were no conversations going on and I would tell you that we're not seeing those any of those indicators and we're also continuing to see in our short cycle business like parts and service, we're continuing to see a lot of strength.

And a lot of projects that have that have been.

Been on hold or are going forward from that perspective. So those are the things that we continue to monitor.

Hopefully that that helps provide some clarity on that.

Yep. Thanks, Kim I appreciate that and logistics is my call up can you talk about maybe the magnitude of price senior realizing across the two businesses relative to last year and your views on sustainability, they're in with respect to price stickiness.

Yeah, I've got a laptop take Bath, yeah sure Matt Yeah. So it really no change from what we've seen I'd say in the last probably four or five quarters.

So we continue to have great processes that were put in place probably two years ago from our global supply chain management team, where we're tracking costs when they go up and as you can imagine more recently costs when they've been going down.

And so again this quarter delivered price cost that was above 100%. We have line of sight to see and that through Q for as well and and even beyond because of some of the good.

The good the process as we have in place between the G. S. Sorry, global supply chain management team as well as our commercial team. So.

We see price cost favorability the rest of this year and into 2004.

Got it thank you guys.

Great. Thanks, Matt.

Okay.

Your next question comes from Daniel more of C. J S Securities. Your line is open.

Thank you good morning, kicking morning, Bob maybe building on that question.

In a P. S. Specifically what was price versus costs for the 14% organic grocery saw in Q3 as well as the high single digit organic growth you expect for the fiscal twenty-three.

And the quarter.

And just the breakdown of that organic growth in terms of price versus volume.

Oh God, yes.

Yeah. So the the price was about about 5% a little less than 5% on the volume beam of the Delta So consider price side of volume closer to to eight or 9%.

Perfect. Thank you.

And then I guess building unmatched question, a little bit as well.

Sticking with this kind of plastics and Aps side is it purely are mainly China, where you are seeing some push out and orders or is it India another geography's as well.

I would say we are seeing it in the in the geographies, where we had pipeline with China.

China, India Middle East.

And are there any common denominators in terms of when you're in your conversations what's causing some of the delays.

The macro uncertainty.

I would say I would say I would say the only one that has kind of its own kind of it's own underground. It's in China, specifically and that's just I think relative to a lot of the macro.

Geopolitical environment that we're operating in there, but other than that I would say that you know some of the some of the projects we continue to discuss in middle East and India.

Just going through normal normal machinations on these types of projects.

Just as they continued to work our way through their their process. The engineering efforts site efforts all those types of things so not we're not I'm not seeing anything.

But I would say is that continuing fee.

Got it that's helpful and then shifting gears to MTS I know it's early obviously.

But given the orders continue to be pushed out.

How should we think about organic revenue growth or may be potential contraction as we can kind of look to fiscal 24 at this stage yeah sure. It's very good good question that.

So obviously, we're going to give guidance next quarter on our queue for earnings call, but we did see I'd.

I'd say modest sequential order improvement and hot runners.

In the quarter.

Q2 injection molding continues to remain soft certainly that because that is somewhat of a backlog business you all of that is gonna put.

<unk> 24 under in a challenging environment and then as we just talked about Kim highlighted right China continues to be a little bit weaker and certainly hot runners as an area, where we are a leading position there right. So it's something that we need and orders to come in here in Q3 and to really but really that's going to impact part of.

Physical 24, so it's something that we're just going to focus on obviously driving all the orders that we can but.

Utilizing the hillenbrand operating model and focusing on continued improvement within our four walls as well as both on the fundamentals of things that we can certainly control.

But again, we will go to provide more more feedback in our in our call next next quarter on 24 guidance.

Mmk and maybe just a little bit of Kim you gave it the anecdote of one business. When I think it was combination of linksys and co period.

Maybe I wouldn't have been able to previously.

Just a little bit more color on the integration of Linksys herbal <unk> Peerless I think last quarter, you alluded to linksys, maybe not being used to hitting public company deadlines, how how are those any great shakes progressing actually and so you know.

I have a lot of credit for these guys have been at these guys have really been running quickly to try and catch up with some of our processes and arcadian surround quarters and kind of re planning on a quarterly basis and those types of things that are normal part of what our other businesses do.

Through through the efforts of the finance team and frankly, I think the efforts of the engineering teams to really understand what kind of payments were looking for and get used to P. O. C that was types of accounting methodologies that are a normal part of our process I think that yeah I think they are.

Viewings make tremendous progress there I would also say that the teams have really been coming together nicely in terms of identifying opportunities, where where we were going to previously be doing by out for some of the.

For some of the product offerings that we have in other parts of the company and really approaching those customers with a fulsome in full co period now solution for for some of these end markets and I've really been please especially with with our team in Kansas City. This you can stab team working very closely with a b.

Comparing include team that they are now bringing those groups together.

Deliver in quotes systems, and we're really saying I think a lot of promise with what they can deliver as a team as opposed to going after these customers individually and we're really excited about that so I think the teams are moving quickly obviously with shrank coming in will bear a certain parts of the immigration activities that we will.

Kind of re imagine and re time, so that we can do everything at once but they have continued to work on operating model improvements that continued to work on getting things under under contract and our global supply management group that continue to work on all of their financial processes.

And there needs to be soft compliant et cetera. So that work continues and then will fold in some of the other activities that will encompass.

<unk> team.

<unk> when they come in starting late this quarter.

Dan I'd say just add on I mean, food and pharma was an absolute bright spot for us in the quarter.

Again, you highlighted the fact that last quarter. We mentioned, we saw a push out maybe some orders and a lot of that was probably just due to the timing of you know a company trying to understand public company requirements, but they did catch up in the quarter and beyond really what we'd spot sequentially food and farmer revenue was up 20% from Q2, and so as we sit here today.

We see high single digit growth here in the next couple of quarters out of that business. So truly a bright spot what we're saying from that team.

Perfect last housekeeping just the lower tax rate is that sort of discreet for Q4 or should we think about that is making more sustainable into fiscal 2004.

Yeah, no that's actually going to be sustainable Dan our tax Tim did a fantastic job with some planning initiatives that will be executed this quarter and that's going to provide benefit moving forward.

Alright, Thanks, Dan.

Once again to ask a question at this time. Please press Star then the number one on your telephone keypad.

Your next question comes from John <unk> of starting in company. Your line is open.

Good morning, everyone and thanks for taking my question.

With backlog.

<unk>.

Levels.

What's the capacity utilization look like across the business profile bottlenecks anywhere how're you dressing ma'am.

Yeah. So I didn't really know no bottlenecks, John I mean, we do we actually have our Aps business because of our significant backlog.

We're actually outsourcing some of that work, which obviously helps us one if we get to a point where we can.

Execute everything within our four walls, we could actually provide in house and protect margins a bit but.

<unk>.

Great. Thanks Bye.

<unk> <unk>.

Considering the weakness in China, I'm actually kind of curious and have you seen any.

Change in the competitive landscape at all more aggressive pricing any potential share a lot since going on there.

Yeah, I think you're definitely gonna see people trying to.

Trying to Ah press on pricing terms and those types of things in order to.

Get volume in the door and so I think that's that's not unusual offer for us to see that you know China.

China is primarily a hot runner business for us as opposed to an injection molding business are primary injection molding markets are really in India, and North America, both of which are a little soft right now and I think part of that is that.

As companies kind of determine what their supply base footprint should look like.

That footprint in multiple areas in in Asia and so.

That's something we continue to monitor obviously, we our global footprint, we have facilities in India. We have facility Hot runner large hotliner facility in China. So whichever way that ends up going we think we are well prepared with personnel engineering resources manufacturing resources procurement resources on the ground and both of us.

Locations to respond to that but we do continue to monitor that and I think in the short term people want to keep their their factory people want to keep their factories busy and so discounting in terms become a part of the short term landscape.

<unk> continued to try and use our operating model to keep control of of our costs and try and stay ahead of what we anticipate in terms of volume I think you see that when you look at the flow through on.

Some of the bike volume challenges, we have in the quarter and and how that flowed through on the bottom I think you see that we're working really hard to balance those and not have an outpaced.

Bottom line. The fact that as a result of some of the short term volume challenges.

Mmm.

Very helpful. Thank you can I guess.

Just one last question given the transformation that accompanies undergone in the past two years has there been given any thought to re branding the hillenbrand name.

[laughter].

Right now we are [laughter] I think right now honestly.

Focused on making sure that we are focused on the integrations right now and.

I think I I think we really done a lot of work in the last year to make sure that hellenbrand his position as a as a pure play global industrial I think.

I think we're we're getting some improved recognition on that front.

And we feel good about that and I think that the most important thing. We can do here is to continue to deliver on profitable growth strategy that we believe will create a compelling value proposition for shareholders.

And and I think that that will that has a much greater impact of continuing to deliver results and.

And that's what we're focused on in the near term.

That's fair enough. Thanks for taking my questions can appreciate.

Sure. Thanks, John .

At this time there are no further questions I'd like to now turn the call back over to Kim Ryan for any closing remarks.

Alright. Thank you again, everyone for joining us on the call today, we really appreciate your ownership and you're interested in hillenbrand and we look forward to talking to you again in November with our full year results.

R. A 2024 guidance have a great rest of your summer. Thanks again.

This concludes today's hillenbrand earnings call. Thank you everyone for attending have a wonderful rest of your day.