Q2 2024 Hillenbrand Inc Earnings Call
Operator: Greetings. Welcome to Hillenbrand's second quarter fiscal year 2024 earnings call. This time, all participants are in lesson only mode. The 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 that this conference is being recorded. At this time, I'll turn the conference over to Sam Mynsberge, Vice President of Investor Relations. Mr. Mynsberge, you may now begin your presentation.
Greetings and welcome to Hillenbrand's second quarter fiscal year 2024 earnings call.
At this time, all participants are in listen only mode.
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 <unk>, Vice President Investor Relations.
Sam: You may now begin your presentation.
Sam Mynsberge: Thank you, Operator. Good morning, everyone.
Sam: Thank you operator, good morning, everyone welcome to Hillenbrand's earnings call, our second quarter fiscal year.
Sam Mynsberge: Welcome to Hillenbrand's earnings call for the second quarter of fiscal year 2024. I'm joined by our President and CEO, Kim Ryan, and our Senior Vice President and CFO, Bob VanHimbergen. I'd like to direct your attention to the supplemental slides posted on our IR website that will be referenced during today's call. Turning to slide 3, a reminder that our comments may contain certain or different statements that are subject to the safe harbor provisions of the Security Clause.
Sam: I'm joined by our President and CEO, Jim Ryan, Our senior Vice President and CFO Bobby Hamburger.
Sam: Thank you direct your attention to the supplemental slides posted on our IR website that will be referenced on today's call.
Sam: Turning to slide three I'll remind you that our comments may contain certain statements that are subject to the safe Harbor provision security laws.
Sam Mynsberge: Also, during the course of this call, we will be discussing certain non-GAAP operating performance measures, including organic comparisons for our segments to exclude the impact of acquisitions, divestitures, and foreign currency exchange rates. Additionally, we will be discussing our results on a continuing operations basis, which excludes the discontinued operations of Baysville, which re-divested in February of last year.
Sam: These statements are not guarantees of future performance actual results could differ materially.
Also during the course of this call you'll be discussing certain non-GAAP operating performance measures, including organic comparisons exclude.
Sam: Excluding the impact from acquisitions.
Sam: Foreign currency exchange rates.
Sam: Also we will be discussing our results from continuing operations basis, which excludes discontinued operations, which we divested in February this year.
Sam Mynsberge: I encourage you to review the appendix and slide 3 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'm going to turn the call over to Kim.
Sam: I encourage you to review the appendix on slide three of the presentation as well as our 10-Q tomorrow.
Sam: For a deeper discussion of non-GAAP information forward looking statements and the risk factors that could impact our actual results with that I will turn the call.
Kimberly K. Ryan: Thank you, Sam, and good morning, everyone. Thanks for joining us on today's call. We continue to operate in a challenging demand environment as global macroeconomic uncertainty continues to impact customer order decisions across many parts of our business. We'll discuss this further in our updated outlook for the remainder of 2024, but first, I'll give a little more color on the dynamics we're seeing in our segments and the actions we're taking in response to the volume headwinds we're facing.
Speaker Change: Sam and good morning, everyone. Thanks for joining us on today's call.
Sam: We continue to operate in challenging demand environment as global macroeconomic uncertainty continues to impact customer order decisions across many parts of our business.
Sam: I'll discuss this further in our updated outlook for the remainder of 'twenty 'twenty four but first I'll give a little more color on the dynamics, we're seeing in our segments and the actions we're taking in response to the volume headwinds we're facing.
Kimberly K. Ryan: Starting with the quarter, we had total revenue growth of 14%, driven by the acquisition of Schenck Processed Food and Performance Materials Business, or FPM, and we delivered adjusted earnings per share of 76 cents, which was in line with our expectations.
Sam: Starting with the quarter, we had total revenue growth of 14% driven by the acquisition of shrink processed food in performance materials business or F. P. M and we delivered adjusted earnings per share of <unk> 76.
Which was in line with our expectation however, while order rates improved sequentially in both segments. They did not rebound to the levels, we expected coming into the year.
Kimberly K. Ryan: However, while order rates improved sequentially in both segments, they did not rebound to the levels we expected coming into the year. In our advanced process solutions segment, we continue to see strong aftermarket performance and solid demand from our polyolefin customers, where the investment cycle has remained resilient and our technological capabilities allowing for the highest output and quality give us a strong competitive advantage. However, this was offset by lower-than-expected orders for mid-sized capital projects in other end markets. However, order pipelines remain robust, and utilization at our test facilities remains high. However, final customer decisions continue to be slower than expected, which is negatively impacting the segment's top line for the year.
Sam: In our advanced process solutions segment, we continued to see strong aftermarket performance and solid demand from our polyolefin customers, where the investment cycle has remained resilient and our technological capabilities, allowing for the highest output at quality gives us a strong competitive advantage. However, this was offset by lower than expected.
Orders for mid sized capital projects in other end markets.
Sam: Pipelines remain robust and utilization at our test facilities remains high however final customer decisions continue to be slower than expected, which has negatively impacted the segment's top line for the year and.
Kimberly K. Ryan: In response, we began implementing cost actions during the quarter, including targeted restructuring and strict limitations on hiring, travel, and other discretionary costs. I'm pleased with the urgency with which the teams have been implementing these actions, which continue to contribute to the 100 basis points of adjusted EBITDA margin expansion that we saw in the quarter. While we anticipate some of these costs will come back, we'll be disciplined until we see orders returning to expected levels.
Sam: In response, we began implementing cost actions during the quarter, including targeted restructuring and strict limitations on hiring travel and other discretionary costs I'm pleased with the urgency in which the teams have been implementing these actions, which continue to contribute to the 100 basis points of adjusted EBITDA margin expansion that we saw.
Sam: In the quarter.
Sam: While we anticipated some of these costs will come back will be disciplined until we see orders returning to expected levels.
Kimberly K. Ryan: Additionally, we continue to make good progress leveraging the Hillenbrand operating model to integrate FPM and Linksys, and we're pleased with the traction that we're getting on margin expansion in these businesses, which is tracking ahead of schedule. However, we have seen a few larger projects get delayed to later in the fiscal year or early fiscal 2025, which puts some pressure on near-term volumes.
Additionally, we continue to make good progress leveraging the hillenbrand operating model to integrate F. P M and links to it and we're pleased with the traction that we're getting on margin expansion in these businesses, which is tracking ahead of schedule.
Sam: See you in a few larger projects get delayed until later in the fiscal year or early fiscal 2025, which put some pressure on near term volume.
Kimberly K. Ryan: Nevertheless, we remain highly confident in the opportunities we see for these businesses to drive long-term growth and value for Hillenbrand. Turning to our molding technology segment, we're pleased to see orders improve by over 10% sequentially, but we've yet to see a clear inflection point in the demand environment, as orders in the quarter were relatively consistent with what we experienced throughout last year. We remain cautiously optimistic that we've hit the trough but do not expect a material recovery in fiscal 2024, which is reflected in our updated guidance that Bob will cover in more detail later in the call. Additionally, we continue to see pressure in our short cycle, high margin hot runner products, causing mix to be a headwind to our previously expected margin profile.
Sam: Last we remain highly confident in the opportunities we see for these businesses to drive long term growth and value for hillenbrand.
Sam: Turning to our molding technology segment, we're pleased to see orders improved over 10% sequentially, but we've yet to see a clear inflection point in the demand environment and the orders in the quarter were relatively consistent with what we experienced throughout last year.
Sam: We remain cautiously optimistic that we've hit the trough, but do not expect a material recovery in fiscal 2024, which is reflected in our updated guidance that Bob will cover in more detail later in the call. Additionally, we continue to see pressure in our short cycle high margin hot runner products, causing mix to be a headwind to our <unk>.
Bob: I expect the margin profile.
Kimberly K. Ryan: As we announced last quarter, we launched a restructuring program for the MTS segment. We've been working diligently on the execution of this program and increased its scope to include an additional facility consolidation, which we executed in March. This is reflected in the $25 million charge we took this quarter, which was higher than the $20 million charge we had previously announced. We also expect an increase in the annual run rate savings associated with the program to be approximately $20 million, up from our previous estimate of $15 million.
As we announced last quarter, we've launched a restructuring program for the MTS.
Bob: We've been working diligently on the execution of this program and increased its scope to include an additional facility consolidations, which we executed in March. This was reflected in the $25 million charge. We took this quarter, which was higher than the $20 million charge, we had previously announced.
We also expect an increase in the annual run rate savings associated with the program to be approximately $20 million up from our previous estimate of $15 million. We believe these actions are appropriate and necessary given the prolonged demand softness and we're confident that we'll be well positioned to return to higher levels of growth and profitability once demand for.
Kimberly K. Ryan: We believe these actions are appropriate and necessary given the prolonged demand softness, and we're confident that we'll be well positioned to return to higher levels of growth and profitability once demand recovers. Since completing the strategic acquisitions that enabled our transformation, debt reduction has been our number one priority in terms of capital allocation. Sustained order delays have continued to negatively impact our cash flow and put pressure on our fee-leveraging timeline in the near term, but our priorities have not changed.
Bob: It covers.
Bob: Since completing the strategic acquisitions that enabled our transformation debt reduction has been our number one priority in terms of capital allocation.
Bob: The order delays have continued to negatively impact our cash flow and put pressure on our deleveraging timeline in the near term, but our priorities have not changed were confident that ongoing working capital optimization initiatives together with the implemented cost control well drive stronger back half performance as we move forward.
Kimberly K. Ryan: We're confident that ongoing working capital optimization initiatives, together with the implemented cost controls, will drive stronger back-half performance as we move forward. Across the enterprise, we've charged ourselves and our global teams to take the necessary actions to position the business for success. We remain energized by our portfolio transformation and believe the secular trends that underpin our key end markets will perform as anticipated over the long term and that our enhanced technological capabilities, engineering expertise, and global reach will allow us to drive differentiated performance in these markets. With that, I'll now turn the call over to Bob to provide more detail on our financial performance and outlook.
Bob: Across the enterprise, we charged ourselves and our global teams to take the necessary actions to position the business for success, we remain energized by our portfolio transformation and believe the secular trends that underpin our key end markets will perform as anticipated over the long term and that our enhanced technological capabilities engineer.
Bob: Bring expertise and global reach will allow us to drive differentiated performance in these markets with that I'll now turn the call over to Bob to provide more detail on our financial performance and outlook.
Robert M. VanHimbergen: Thanks, Kim, and good morning, everyone. Turning to our consolidated performance on slide five. We delivered revenue of $785 million, an increase of 14% compared to the prior year due to the acquisition of FPL. However, on an organic basis, revenues decreased 5% year-over-year, as higher aftermarket revenue and pricing were more than offset by lower capital equipment volume, led by a decrease in MCF. Adjusted EBITDA of $123 million increased 13%, but decreased 7% organically, as pricing, cost containment actions, and product mix were more than offset by cost inflation and lower MTS volume.
Bob: Thanks, Kim and good morning, everyone.
Bob: Turning to our consolidated performance on slide five.
Bob: We delivered revenue of $785 million, an increase of 14% compared to the prior year due to the acquisition of FTL.
Bob: On an organic basis revenues decreased 5% year over year as higher aftermarket revenue and pricing were more than offset by lower capital equipment volume led by a decrease in Mcs.
Bob: Adjusted EBITDA of $123 million increased 13%, but decreased 7% organically as pricing cost containment actions and product mix were more than offset by cost inflation and more MTS volume.
Robert M. VanHimbergen: We delivered a consolidated adjusted EBITDA margin of 15.6%, which was essentially flat to the prior year. We reported gap net income of $6 million, or $0.09 per share, down $0.24 from the prior year as the impact of the FPM acquisition, lower tax expense, pricing, and cost containment were more than offset by an increase in restructuring costs, cost inflation, lower organic volume, and higher interest rates. Adjusted earnings per share of $0.76 increased by $0.02, or 3%. Our adjusted effective tax rate in the quarter was 28.1%, which is in line with our expectations.
Bob: We delivered consolidated adjusted EBITDA margin of 15, 6%, which was essentially flat to the prior year.
Bob: We reported GAAP net income of $6 million or <unk> <unk> per share down <unk> 24 from the prior year as the impact of the F. P. M acquisition lower tax expense pricing and cost containment were more than offset by an increase in restructuring costs cost inflation lower organic volume and higher.
Interest expense.
Bob: Adjusted earnings per share of <unk> 76 increased two or.
Or 3%.
Bob: Our adjusted effective tax rate in the quarter was 28, 1%, which is in line with our expectations.
Robert M. VanHimbergen: Our cash flow from operations was $3 million in the quarter, down approximately $47 million from the prior year and below our expectations, primarily due to the timing of working capital requirements on large projects and lower customer advantage. We continue to deploy the Hillenbrand Operating Model to drive working capital efficiency around trade receivables, payables, and inventory, where we saw an improvement as a percentage of sales of over 350 basis points year-over-year, as well as sequential improvement.
Bob: Our cash flow from operations was $3 million in the quarter down approximately $47 million from the prior year and below our expectations, primarily due to the timing of working capital requirements on large projects and lower customer advances.
Bob: We continue to deploy the hillenbrand operating model to drive working capital efficiency around trade receivables payables and inventory, where we saw an improvement as a percentage of sales of over 350 basis points year over year as well as sequential improvement.
Robert M. VanHimbergen: However, as a result of lower volumes and lower customer advances, we now expect our free cash flow for the full year to be in the range of $130 million to $150 million, versus our previous expectation of roughly $230 million. Now moving to segment performance, starting with APS on slide 6.
Bob: However, as a result of more volumes and more customer advances, we now expect our free cash flow for the full year to be in the range of $130 million to $106 million versus.
Bob: Versus our previous expectation of roughly $230 million.
Bob: Now moving to segment performance starting on EPS on slide six.
Robert M. VanHimbergen: Revenue of $559 million increased 30% compared to the prior year, driven by FDM. However, organic revenue was flat year-over-year, as higher aftermarket volume and pricing were offset by lower capital equipment volume, particularly in midsize systems. Adjusted EBITDA of $101 million increased 38% year-over-year and was up 7% organically, primarily driven by favorable price costs and cost containment, partially offset by lower capital equipment volume. We delivered an adjusted EBITDA margin in the quarter of 18%, which was up 100 basis points over the prior year, primarily due to cost containment, favorable product mix, and progress on integration initiatives. Backlog of $1.9 billion increased 12% compared to the prior year, driven by FPM.
Bob: Revenue of $559 million increased 30% compared to the prior year driven by SPM.
Bob: Organic revenue was flat year over year as higher aftermarket volume and pricing were offset by lower capital equipment volume, particularly in mid sized systems.
Bob: Adjusted EBITDA of $101 million increased 38% year over year and was up 7% organically, primarily driven by favorable price cost and cost containment, partially offset by lower capital equipment volume.
Bob: We delivered adjusted EBITDA margins in the quarter of 18%, which was up 100 basis points over the prior year, primarily due to cost containment favorable product mix and progress on integration initiatives.
Bob: Backlog of $1 $9 billion increased 12% compared to the prior year driven by SPF.
Bob: On an organic basis backlog decreased 5%.
Bob: Sequentially backlog was down 2%, but was flat excluding foreign exchange.
Robert M. VanHimbergen: On an organic basis, backlog decreased 5%. Sequentially, backlog was down two percent, but it was flat, excluding foreign exchange. Turning to MTS on slide 7.
Now turning to MTS on slide seven.
Robert M. VanHimbergen: Revenue of $226 million decreased 13% year-over-year, primarily driven by lower volume for injection molding equipment. While Injection Moulding faced a tough comparable against the prior year, their revenue performance exceeded our expectations for the quarter, as the teams did a good job accelerating project execution from backlog. But this was largely offset by softer than expected performance in our HotRunner product line, largely due to softer demand in North America. Adjusted EBITDA of $34 million decreased 29% due to lower volume and cost inflation.
Bob: Revenue of $226 million decreased 13% year over year, primarily driven by lower volume for injection molding equipment.
Bob: While injection molding faced a tough comparable against the prior year the revenue performance exceeded our expectations for the quarter as the teams did a good job of accelerating project execution from backlog.
Bob: This was largely offset by softer than expected performance in our hot runner product line largely due to softer demand in North America.
Bob: Adjusted EBITDA of $34 million decreased 29% due to lower volume and cost inflation.
Robert M. VanHimbergen: Partially offset by cost containment. The adjusted EBITDA margin of 14.9% decreased 330 basis points compared to the prior year, largely driven by the impact of lower volumes on operating leverage and price-cost pressure. In addition, we've identified isolated operating efficiencies in one of our hot runner facilities in North America. We've aggressively pursued cost actions during the quarter to help support back half profitability given these challenges. Backlog of $230 million decreased 23% compared to the prior year, but it was essentially flat on a sequential basis.
Bob: Partially offset by cost containment.
Bob: Adjusted EBITDA margin of 14, 9% decreased 330 basis points compared to the prior year, largely driven by the impact of lower volumes and operating leverage and price cost pressure.
Bob: In addition, we've identified isolated operating efficiencies in one of our hot runner facilities in North America.
Bob: We've aggressively pursued cost actions during the quarter to help support back half profitability given these challenges.
Bob: Yeah.
Bob: Backlog of $230 million decreased 23% compared to the prior year, but was essentially flat on a sequential basis.
Robert M. VanHimbergen: As Kim mentioned, orders improved sequentially but did not fully recover the shortfall we experienced in Q1. We saw bright spots of demand for injection molding equipment, particularly for automotive and packaging applications. Weakness in Consumer Goods and Electronics weighed on our higher margin HotRunner product, particularly in North America, as I mentioned. According to slide 8, net debt at the end of the second quarter was $1.88 billion, and the net debt to adjusted EBITDA ratio was 3.5 times.
Bob: As Kim mentioned orders improved sequentially, but did not fully recover the shortfall we experienced in Q1.
Bob: We saw bright spots of demand for injection molding equipment, particularly for automotive and packaging applications, but weakness in consumer goods and electronics Wade.
Weighed on our higher margin Hot runner product line, particularly in North America as I mentioned.
Bob: Turning to slide eight.
Bob: Net debt at the end of the second quarter was $1 8 billion and net debt to adjusted EBITDA ratio was three five times.
Robert M. VanHimbergen: As net debt reduction remains our number one priority, we're disappointed with the modest increase in our leverage, which was slightly above our expectations due to the weaker cash flow and order. Given these conditions, it will be a challenge to achieve our deleveraged target of returning to within our net leverage guardrails of 1.7 to 2.7 times by a previously stated goal of second quarter fiscal 2025. We'll continue to aggressively pursue cost actions and working capital efficiencies to further reduce leverage, but we'll have to revisit the timeline for returning to our guardrails once we have more visibility into order patterns normalized.
Bob: As net debt reduction remains our number one priority we're disappointed with a modest increase in our leverage which was slightly above our expectations due to the weaker cash flow and orders.
Bob: Given these conditions it will be a challenge to achieve our deleveraging target of returning to us on our net leverage guardrails of one 7% to two seven times by our previously stated goal of second quarter fiscal 2025.
Bob: We'll continue to aggressively pursue cost actions and working capital efficiencies to further reduce leverage but we'll have to revisit the timeline for turning to our guard rails. Once we have more visibility to order pattern. It's normalizing.
Robert M. VanHimbergen: We'll now wrap up with our revised outlook for the major of 2024. As mentioned, order patterns in the quarter remain below our original expectations. We've yet to see materials shift and underline market conditions, and consequently, we're upping our outlook to reflect current demand trends. For full year 2024, we now expect total revenue for Hillenbrand of $3.2 billion to $3.3 billion, previously $3.3 to $3.4 billion. Adjusted EBITDA is now expected to be in the range of $512 to $536 million. Previously, it was expected to be between 530 to 588. Adjusted EPS is now expected to be $3.30 to $3.50, whereas previously it was $3.60 to $3.95.
Bob: I will now wrap up with a revised outlook for the remainder of 2024.
Bob: As mentioned order patterns in the quarter remained below our original expectations, we've yet to see material shift in underlying market conditions and consequently, we are updating our outlook to reflect current demand trends.
Bob: For full year 2024, we now expect total revenue for hillenbrand of $3 2 billion to $3 3 billion.
Bob: Previously three three to $3 4 billion.
Bob: Adjusted EBITDA is now expected to be in the range of $512 million to $536 million.
Bob: Previously $530 million to $588 million.
Bob: Adjusted EPS is now expected to be $3 30.
Bob: To $3 70.
Bob: Previously $3 63.
Bob: $3 95.
Robert M. VanHimbergen: For APS, the changes reflect lower volumes due to order timing and the impact of fixed cost leverage, although partially offset by cost actions and accelerated margin performance within the recent acquisition. In MTS, we're seeing unfavorable product mix, pricing pressure, and isolated operating inefficiencies within our hot runner product line, partially offset by roughly $8 million of in-year MTS restructuring benefits. We're seeing better performance in our injection molding product line compared to our original expectation, given some larger orders that came through in Q2. But, as a reminder, this comes in at a lower relative margin.
Bob: For Acs changes reflects lower volumes due to order timing and the impact of fixed cost leverage partially offset by cost actions and accelerated margin performance within the recent acquisitions.
Bob: MTS were seeing unfavorable product mix pricing pressure and isolated operating inefficiencies within our hot runner product line <unk>.
Bob: We offset by roughly $8 million of in year MTS restructuring benefits.
Bob: We're seeing better performance in our injection molding product line compared to our original expectations given some larger orders that came through in Q2, but as a reminder, this comes in at a lower relative margin.
Robert M. VanHimbergen: Our higher-margin hot runner product line remains softer than expected, particularly in North America, and as I mentioned, we're experiencing operating inefficiencies in one of our hot running facilities, which is putting additional pressure on margin through our restructuring and capacity optimization efforts. We're actively working to return to expected levels of efficiency, which we expect to start seeing in the fourth quarter. For Q3, we are targeting adjusted earnings per share in the range of $0.80 to $0.85, reflecting moderately improved performance in both segments on a sequential basis.
Bob: Our higher margin Hot runner product line remained softer than expected, particularly in North America and as I mentioned, we're experiencing operating inefficiencies in one of our hot running facilities, which is putting additional pressure on margins.
Bob: Through our restructuring and capacity optimization optimization efforts, we're actively working to return to expected levels of efficiency, which we expect to start seeing in the fourth quarter.
Bob: Okay.
Bob: For Q3, we are targeting adjusted earnings per share in the range of 80 to 85.
Bob: Reflecting moderately improved performance in both segments on a sequential basis.
Robert M. VanHimbergen: Please review slide 9 for additional guidance. In summary, we recognize the headwinds we're facing, and we're taking actions to enable the business to navigate this challenging environment. We will remain vigilant and pursue additional actions as necessary. At the same time, we remain excited about the opportunities for growth and margin expansion we see for the businesses over the long term. With that, I'll turn the call back over to Kim.
Bob: Please review slide nine for additional guidance assumptions.
Bob: In summary, we recognize the headwinds we're facing and we're taking actions to enable the business to navigate this challenging environment.
Bob: We will remain vigilant pursue additional actions as necessary.
Bob: At the same time, we remain excited about the opportunities for growth and margin expansion, we see for the businesses over the long term.
Bob: With that I'll turn the call back over to Kevin.
Kimberly K. Ryan: Thanks, Bob. Before taking questions, I'll end our presentation this morning with a few final remarks. We acknowledge that orders continue to be softer and more cyclical throughout various parts of our business as headwinds have persisted beyond our initial expectations. As Bob discussed, our revised guidance range reflects the current market conditions and the expected trajectory of the businesses throughout the rest of the year.
Kevin: Thanks, Bob before taking questions I'll end our presentation. This morning with a few final remarks, we acknowledged that orders continue to be softer in more cyclical throughout various parts of our business has headwinds have persisted beyond our initial expectations as Bob discussed our revised guidance range reflect the current market conditions and the.
Kevin: Expected trajectory of the businesses throughout the rest of the year.
Kimberly K. Ryan: I have strong conviction that our internal initiatives and diligent execution will guide us through the near term and that our strong grants and process technologies remain best in class in their ability to solve our customers' most complex processing needs anywhere in the world. Finally, as we announced a few weeks ago, we'll be featuring a number of our brands at next week's Plastics Trade Show, NPE, in Orlando, Florida. As one of the largest plastics trade shows in the world, this is a great opportunity for us to engage with customers and highlight the breadth of our capabilities and key innovations in supporting the critical elements of the plastics value chain, from pellet production to manufacturing products to recycling. It will be a leading sponsor of the education sessions featuring industry experts within our business, as well as host the annual Circular Plastics Challenge again this year in partnership with Net Impact and Coca-Cola, With that, we'll now open the line for your questions.
Kevin: I have strong conviction that our internal initiatives and diligent execution will navigate us through the near term and that our strong brands and process technologies remains best in class and their ability to solve our customers' most complex processing needs anywhere in the world.
Kevin: Finally, as we announced a few weeks ago will be featuring a number of our brands at next week's plastics, Tradeshow MTBE and Orlando, Florida as one of the largest plastics trade shows in the World. This is a great opportunity for us to engage with customers and highlight the breadth of our capabilities in key innovation supporting the critical elements.
Kevin: The plastics value chain from pellet production to manufacturing products to recycling.
Kevin: We'll be a leading member of the education sessions, featuring industry experts within our business as well as hosting the annual circular plastics challenge again this year in partnership with net impact and Coca Cola or teams from all around the world come together to promote innovation within the plastics industry circumstance sustainability.
Kevin: And the circular economy.
Speaker Change: With that we'll now open the line for your questions.
Speaker Change: Thank you.
Operator: We'll now be conducting a question and answer session. If you'd like to ask a question at this time, please press star 1 on your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to withdraw your question from the queue. For participants that are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Once again, that is star number 1.
Speaker Change: I will now be conducting a question and answer session.
Speaker Change: To ask a question at this time, please press star one from your telephone keypad.
Speaker Change: A confirmation tone will indicate your line is that the question queue.
Speaker Change: Let me first start to feel like to withdraw your question from the queue.
Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Speaker Change: One moment, please pull for questions. Once again that is star one thank you.
Operator: Thank you. Thank you, and our first question today is from the line of Matt Summerville with D.A. Davidson. Please proceed with your question.
Speaker Change: Thank you and our first question today is from the line of Matt Summerville with D. A Davidson. Please proceed with your questions.
Matt J. Summerville: Thanks. Maybe you mentioned, can you talk a little bit about the quarter on quarter sequential order improvement you've seen across both segments? What markets and geographies are driving that? And what you've seen thus far in April, does that indicate at least some level of sustainability?
Speaker Change: Thanks.
Matt J. Summerville: Just maybe you mentioned.
Matt J. Summerville: Can you talk a little bit about the quarter on quarter sequential order improvement you've seen across both segments, what markets and geographies are driving that and what you've seen thus far in April does that indicate at least some level of sustainability.
Kimberly K. Ryan: So, the orders, well, first of all, good morning Matt. Bob and I will both kind of ham and egg this question a bit.
Speaker Change: So the so the order is well first of all good morning, Matt.
Speaker Change: Bob and I are both kind of thing.
Speaker Change: And then I guess question Bert.
Kimberly K. Ryan: So, on the APS side, you know, we saw some orders; we saw orders for those larger projects. And so, while those were some of the things we were waiting on, we did start seeing some of those break in the last quarter. And what I would say to that is that we were pleased with kind of obtaining more than what I would say is our fair share of those procurement decisions as they came to pass. So, we were pleased with that.
Speaker Change: So on the Aps side, we saw some orders we saw orders in those larger projects and so while those were some of the things we were waiting on we did start seeing some of those break in the last quarter and what I would say to that is that we were pleased with obtaining more than what I would say is our fair share of those order does.
Speaker Change: Patients as they as they came to pass. So we were pleased with that there are still as you know there is still a robust order pipeline on those large projects that is anticipated to come over the next several quarters. The place where we have continued to see some of the some of the delays in decision, making as kind of those mid sized projects whether they're.
Kimberly K. Ryan: There is still, as you know, a robust order pipeline for those large projects that are anticipated to come over the next several quarters. The place where we have continued to see some of the delays in decision making is kind of those mid-sized projects, whether that's compounding lines or whether that's some of the larger food lines that we've been bidding on. Some of those are even some of the ones that we are going to market with as, for instance, a consolidated portfolio in our systems offering for the first time as we're building our pipeline for that.
Speaker Change: Compounding lines or whether that is some of the larger fee lines that we've been getting on some of those or even some of the ones that we are going to market with as a for instance at the consolidated portfolio and our systems are operating for the first time as we're building our pipeline for that so that's those are some of the places where we've seen a little bit.
Kimberly K. Ryan: So, those are some of the places where we've seen a little bit of slowness. The quick cycle business, like the service business, has continued to see great performance, good strength, kind of on a global basis across all of the brands. And we have recently announced that the service organization for the new food acquisitions is also going to become a part of the service organization of APS.
Speaker Change: Slowness that quick cycle business like be.
Speaker Change: Like the service business has continued to see great performance, good strength kind of on a global basis across all of the brands and we have recently announced that the service organization.
Speaker Change: For the for the new food acquisitions also gonna to become a part of the service organization of Aps and so we're really looking forward to the traction that will gain there having them be a part of the entire service.
Kimberly K. Ryan: And so, we're really looking forward to the traction that we'll gain there, having them be a part of the entire service structure of the business, so that we can begin to focus our efforts there on the expansion that we've talked about from a synergy standpoint. On the MTS side, what we saw was a bit of recovery, specifically in North America, in the automotive area, in injection molding, and so we were pleased to see that, you know, that's a good thing. They have been in a period over the last six or so quarters where they've been at this low.
Speaker Change: Structure of the business. So that we can begin to focus our efforts there on the expansion that we've talked about from a synergy standpoint.
On the MTS side, what we saw was a bit of recovery specifically in North America in the automotive area in the injection molding and so we were pleased to see that.
Speaker Change: That said that has been.
They have been in a period over the last six or so quarters, where they've been they've been at this low. This is there. This is our highest order intake on the injection molding side of the business in seven quarters. So we were pleased with that.
Kimberly K. Ryan: This was their highest order intake on the injection molding side of business in seven quarters, so we were pleased with that. And hopefully, we've seen the bottom and are starting to come out of that a bit. On the hot runner side, we continue to see some softness, and that is primarily, you know, that is a China and North America market for us primarily, although we have footprints in India. We have, you know; we service European geographies.
Speaker Change: And and hopefully we've seen the we've seen the trough and are starting to come out of that a bit.
Speaker Change: On the hot runner side, we continue to see some softness and that is primarily you know that.
Speaker Change: China and North American market for US, primarily we have footprint in India. We have we service the European geographies those aren't the largest part of the market, though so our market has kind of dictated by that in the hot runner spaces dictated by primarily the China market and the and in the U S market.
Kimberly K. Ryan: Those aren't the largest part of the market, though, so our market is kind of dictated by those in the hot runner space, dictated primarily by the Chinese market and the U.S. market. We have a decently sized footprint in consumer goods, which is not an area that has recovered yet on the hot runner side, so we continue to monitor that on the hot runner side. But again, on the injection molding side, we've seen some nice pickups in some of the markets that are relevant for us and anticipate, at least as we talk to our businesses, the outlook continues to be, I would say, optimistic in those areas as they begin to see some upticks.
Speaker Change: We have we have a decently sized footprint in consumer goods, which is not an area that has recovered yet on the hot runner side. So.
Speaker Change: We continue to monitor that on the hot runner side, but again on the injection molding side, we've seen some nice pickups in some of the markets that are relevant for us and anticipate at least as we talk to our businesses the outlook.
Speaker Change: <unk> continues to be I would say optimistic in those areas as they begin to see some uptick but anything else that I did not and I think you've covered everything.
Kimberly K. Ryan: Do I have anything else that I did not have?
Kimberly K. Ryan: So, as a follow-up, you mentioned... Yeah, yeah, no, absolutely not. Thank you, Kim. With respect to the commentary regarding the incremental price pressure you've seen in MTS, I'm curious, as you've gone back and realized you acquired this in late calendar 19, so I understand that, but as you've gone back and, I'm sure, studied past cycles, is that typical customer behavior in the latter stages of a downturn in that business? And then if you could maybe delineate a little bit the takedown you had in the MTS EBITDA margin guide, can you maybe parse that out a little bit between how much of that is adverse moves in price costs versus the inefficiency issues that I believe Bob touched on? Sorry, yeah, so...
Speaker Change: So thank you.
Speaker Change: You mentioned.
Speaker Change: Yes, yes, no absolutely. Thank you Kim.
Speaker Change: With respect to the commentary regarding the incremental price pressure you've seen in MTS I'm curious as you've gone back and realizing you acquired this one way COVID-19, so I understand that but as you've gone back and I'm sure studied past cycles is that typical customer behavior in.
The latter stages of a downturn in that business and then if you could also maybe delineate a little bit to take down you had in the end.
Speaker Change: <unk> EBITDA margin guide can you, maybe parse that out a little bit between how much of that is adverse moves in price cost versus the inefficiency issues that I believe Bob touched on sorry, yes. So.
Robert M. VanHimbergen: So, yeah, so... You know, Matt, on your first question, you know, it is typical, you know, when there is a downturn, that there's this pricing pressure, you know, it's a little bit different now versus the last cycle, just because China, you know, isn't growing at the levels that was, you know, call it six or seven years ago, but it is typical that, you know, to have pricing pressure, you know, during these, these cycles, you know, and as far as the margins, you know, really, the pricing pressure is probably, we call it pricing is probably a third of the margin decline, unfavorable mix from what we thought is probably a third as well. And then the manufacturing inefficiencies, probably a third. And again, you know, the restructuring, we expect to, you know, clean that up. And so we'll get out of that. And, you know, Q4, as I mentioned. Got it.
Speaker Change: Matt on your first question you know it is typical when there.
Speaker Change: There is a downturn that there is this pricing pressure, it's a little bit different now versus the last cycle, just because China is growing at the levels. It was call it six or seven years ago, but it is typical to have pricing pressure during these cycles.
Speaker Change: And as far as the margins.
Speaker Change: Really the pricing pressure is probably call. It pricing is probably a third of the margin decline unfavorable mix from what we thought is probably a third as well and then the the manufacturing inefficiencies probably a third and again the restructuring we expect to clean that up and so we will get out of that in.
Speaker Change: Q4, as I mentioned.
Robert M. VanHimbergen: Got it. Thank you, guys.
Got it thank you guys.
Speaker Change: Great. Thanks, Pat.
Operator: Thank you. As a reminder, to ask a question today, you may press star 1 on your telephone keypad. Our next question is from the line of Daniel Moore with CJS Securities. Please proceed with your question.
Speaker Change: Thank you.
Speaker Change: Reminder, to ask a question you May press star one from your telephone keypad.
Speaker Change: Our next questions are from the line of Daniel Moore with CJS Securities. Please proceed with your questions.
Daniel Joseph Moore: Thank you. Kim and Bob, I appreciate the call and taking questions.
Daniel Joseph Moore: Thank you.
Daniel Joseph Moore: Jim and Bob appreciate the color and taking my questions.
Daniel Joseph Moore: Forgive me. If this is a rehash of matts first question to some extent, but just looking at the mid size equipment projects and Aps.
Daniel Joseph Moore: Forgive me if this is a rehash of Matt's first question to some extent, but just looking at the midsize equipment projects in APS, you know, it sounds like you're seeing delays. Are you seeing any order cancellations at this stage? And what are you hearing from your customers in terms of, you know, what they need to turn their investments to get back on? Is it lower interest rates? Is it geopolitical stability? Like what is it that's the key holdup? Thanks.
Speaker Change: You know.
Daniel Joseph Moore: It sounds like Youre seeing delays are you seeing any order cancellations at this stage and what are you hearing from your customers in terms of what they need to turn the investments to get back on is at lower interest rates as the geopolitical stability like what is it that's the key holdup.
Kimberly K. Ryan: So what we're hearing on those mid-sized projects, one of the things that I think is going to be exciting about this is that we, you know, those mid-sized projects typically follow where we've had large teleprojects. So as capacity is coming online, then that capacity has to go somewhere.
Speaker Change: So so we are.
Speaker Change: We're hearing on those midsized projects one of the things that Todd.
Speaker Change: It's going to be exciting around that says that we.
Speaker Change: Those mid sized projects typically follow they typically follow where we've had large pellet projects. So as capacity is coming online and that capacity has to go somewhere and typically these mid sized projects are compounding lines and things like that now in certain geographies. There are you know China is an example, which has been a large investment area.
Kimberly K. Ryan: And typically, these mid-sized projects are compounding lines and things like that. Now in certain geographies, there are, you know, China is an example, which has been a large investment area for us. We didn't always, that wasn't a big compounding footprint for us historically.
Speaker Change: For us we didn't know if that wasn't a big compounding footprint for us. Historically, however, what we are seeing that is encouraging from our point of view is that as these formulations and requirements for these products the output requirements.
Kimberly K. Ryan: However, what we are seeing that is encouraging from our point of view is that as these formulations and the requirements for these products change, the output requirements are increasing, the quality requirements are increasing, and that moves closer to what we do. And so some of the opportunities that we see in these markets where we've been putting a lot of capital investments in on the large projects, where we think a lot of these relationships will continue to foster themselves into new opportunities for us to get into that mid-sized project space because of the increasing complexity of demand.
Speaker Change: Requirements are increasing the quality requirements are increasing and that moves towards what we do and so some of the you know there are some opportunities that we see in these markets, where we've been putting a lot of capital investments and on the large projects, where we think a lot of these.
Speaker Change: These relationships will continue this posture themselves into new opportunities for us to get into that mid sized project space because of the increasing complexity of demand and so that is that's kind of an exciting opportunity for us.
Kimberly K. Ryan: And so that is, that's kind of an exciting opportunity for us. From that point of view, I would say that we feel pretty bullish about some of the opportunities that will be coming down the road. Remember, the cycle times for those jobs are significantly shorter than the, call it, four years that you might see for one of those large, really large project investments between the time that the project is conceived and the time that the plant is commissioned. So that's kind of what we're looking at. And in the meantime, we're continuing to build our service business with our large implementations and continue to focus on that on a global basis.
Speaker Change: From that point of view I would I would tell you that we feel we feel pretty pretty bullish about some of the opportunities that will be coming down the road.
Speaker Change: What what expectations are there, but you know I think we have to continue to see a leveling out in consumer demand.
We have to continue to make sure that these plants are coming online the plants, we've been working on for a number of years now in certain geographies as those come on online at.
Speaker Change: The investments for the next step of the process well will break free come online remember the cycle times for those jobs are significantly shorter than that call. It four years that you might see border. It wasn't as large really large project investments between the time that the projects can see and the time that the plant is commissioned so that's that's kind of what we're looking at and then.
Speaker Change: Meantime.
Speaker Change: We're continuing to build our service business.
Speaker Change: Our large implementations and continue to focus on that on a global basis.
Robert M. VanHimbergen: Yeah, and then Dan, just to be specific to your question, we've had no cancellations on orders and no cancellations in our pipelines. Our pipelines are built on active discussions, and those continue to grow, and, you know, I think interest rates certainly are a factor, and as those start to maybe decline, I think we'll get some of these unlocked.
Speaker Change: Yes, and then Dan just specific to your question, Yes, we have had no cancellations on orders and no cancellations in our pipelines. Our pipelines are built on active discussions on most continue to grow and.
Speaker Change: I think interest rates certainly is a factor and as those start to maybe decline I think we will get some of these unblocked.
Speaker Change: Yeah.
Robert M. VanHimbergen: That's helpful; appreciate it. Any, you know, more color on the incremental restructuring efforts, where specifically the cost saves are coming from, and how do we think about kind of incremental margins when volume eventually starts to recover? Is there, you know, a kind of shorter or medium-term benefit in terms of the incrementals following not just the incremental 5 million but the overall restructuring program?
Speaker Change: That's helpful. Appreciate it.
Speaker Change: Any.
Speaker Change: Just some more color on the incremental restructuring efforts, where specifically the cost saves are coming from and how do we think about kind of incremental margins when volume of vessels eventually starts to recover is there.
Speaker Change: Kind of a short or medium term benefit.
Speaker Change: In terms of the Incrementals following the.
Speaker Change: Not just the incremental $5 million, but the overall restructuring program.
Robert M. VanHimbergen: Yeah, so we did announce, obviously, in our last quarter call, that we expected to take a charge of about $20 million in Q2. We did bring that up a bit to about $25 million, and then we therefore increased our savings expectations from $15 million to now $20 million. Now, that's going to be about $8 million of benefit coming in 2024, with the full expected run rate to come in 2025. As far as APFs go, you did see in our prepared remarks, we are taking some smaller targeted charges, particularly in North America, and that's really just to adjust for some of the near-term order pressure in some of those product lines that we highlighted, so the small and mid-term projects.
Speaker Change: Yeah. So so.
Speaker Change: So we did announce obviously on our last quarter call, we expected to take a charge of about $20 million in Q2, we did.
Speaker Change: Bring that up a bit to about $25 million and then we then therefore increased our savings expectations from $15 million to now 20, now that's going to be about $8 million of benefit coming in 2024 with four full expected run rate to come in 2025.
Speaker Change: As far as you know a PFS.
Speaker Change: You did see in our prepared remarks, we are taking some smaller targeted charges, particularly in North America, and that's really just to adjust for some of the near term order pressure on some of those product lines that we highlight some of the small and mid term.
Speaker Change: Projects and one one thing Dan just as you know I know.
Robert M. VanHimbergen: And one thing, Dan, just as we've talked about this before, but I'll just kind of embrace this again. Remember when we started significantly expanding the order levels in APS, we began to develop partners. So we have a certain amount of that capacity that we execute inside and a certain amount of that capacity that we have developed partners outside the business. So if you look at the nearly doubling of that business over the last five or six years, the footprint of employees has not doubled in response to that.
Speaker Change: We've talked about this before but I'll just kind of embraced us again remember when we started expanding.
Speaker Change: Significantly the.
Speaker Change: Order levels in Aps, we began to develop.
Speaker Change: Partners. So we have a certain amount of that capacity that we execute inside and a certain amount of that capacity that we have developed partners outside the business. So if you look at the nearly doubling of that business over the last five or six years the footprint of employees have not doubled them.
In response to that and what that does is it gives us a certain ability to flex.
Kimberly K. Ryan: And what that does is it gives us a certain ability to flex when demand goes up or down. And what you've seen over the last quarter, the last couple of quarters, we were flexing down, and we were able to do that without a lot of incremental cost. And then we will be able to flex back up as orders come in. So, for instance, we saw a number of orders come in for those large projects.
Speaker Change: When demand goes up or down and what you've seen over the last quarter. The last couple of quarters, we were flexing down and we were able to do that without a lot of incremental cost.
Speaker Change: And then we will be able to flex back up as orders come in and so for instance, we saw a number of orders come in and those large projects. So now we're back at a point, where we need that flex capacity that for instance, we hadn't taken offline.
Kimberly K. Ryan: So now we're back at a point where we need that flex capacity that, for instance, we had taken offline over a couple of quarters before that. But that took us a number of years to develop. And so I'll give a lot of credit to our part on his team on the Comperian side at anticipating this and developing those partners over a number of years. It's a muscle that we're working to build all over the company, but it's been a great tool for us now.
Speaker Change: A couple of quarters before that but that that took us a number of years to develop and so I'll give a lot of credit to two.
Speaker Change: Our part on his team.
Speaker Change: Here inside it and anticipating message developing those partners over a number of years, it's that it's a muscle that we that we're working to build all over the company, but it's it's been it's been a great tool for US now and so we're using that right. Now is we're trying to get these new projects that have been signed in the last quarter.
Kimberly K. Ryan: And so we're using that right now as we try to get these new projects that were signed in the last quarter up and running again, and while we've still got pieces of the business that are kind of waiting on a bit of the order pipeline to flow through. Yeah, and because of that flexibility.
Speaker Change: Up and running again and what.
Speaker Change: While we still got pieces of the business that are kind of waiting on a bit of the order pipeline flow through.
Robert M. VanHimbergen: Yeah, and because of that flexibility, Dan, you know, if you're requesting incrementals and APFs, you know, that's generally in that 35 to 40 percent range, and because of that flexibility, that's how we're able to maintain that flow.
Speaker Change: Because of that flexibility down to your question on Incrementals in Etfs, that's generally in that 35% to 40% range and because of that flat. That's how we're able to maintain that flow through.
Daniel Joseph Moore: Got it. Last one for me. I'll jump back in line. Obviously, as you called out, free cash flow is softer than and, you know, the revision in free cash flow is certainly higher than the change in the EBITDA guide. Just kind of walk us through the biggest buckets impacting free cash this year and how long you anticipate it will take to get back to the more typical 90 to 100 percent conversion rate that you target.
Speaker Change: Got it last one for me.
Speaker Change: Jump back in queue.
Speaker Change: See as you called out you know free cash flow softer than the then.
Speaker Change: And you know this.
Speaker Change: The revision in free cash flow.
Speaker Change: You know certainly higher than the change in the EBITDA guide just kind of walk us through the biggest buckets impacting free cash this year.
Speaker Change: And how long would you anticipate is likely to take to get back to the more typical 90% to 100% conversion rate that you target. Thank you.
Robert M. VanHimbergen: Yeah, so the reduction is probably half earnings and half advances related to timing of order stand. Now, I'd say that's partially offset by the trade working capital improvement actions that we've been focused on, and so we continue to focus on the fundamentals around improving our trade AR, trade AP, and inventory. And so, as I mentioned, we did see some good improvements in those areas over the last year, and I'd expect to see continued trade working capital improvements as a percent of sales here moving forward.
Robert M. VanHimbergen: Thank you. Yeah, so that...
Speaker Change: Yes.
Speaker Change: The reduction is probably half earnings and half advances related to timing of orders stand now I'd say thats, partially offset by the trade working capital improvement actions that we've been focused on and so we continue to focus on the fundamentals around improving our trade they are trade AP and inventory.
Speaker Change: So as I mentioned, we did see some good improvements in those areas and over the last year and I would expect to see continued trade working capital improvements as a percent of sales here moving forward and thats both on the acquisitions, but also even on the legacy businesses.
Robert M. VanHimbergen: And that's both on the acquisitions but also on the legacy businesses. And, you know, so as those orders, you know, as those orders finally get released, again, we saw some of that, the large orders get released in Q2, and, you know, I think as we get into 25, I think we'll be back to that 90 to 100% range, you know, pending the order timeframe. But in the meantime, we're going to be focused on the fundamentals that we can control.
Daniel Joseph Moore: Thanks. I'll circle back with my follow-up.
Speaker Change: So as those orders those orders.
Speaker Change: Finally get released again, we saw some of that the large orders getting released in Q2 and I think as we get into 'twenty five I think it would be back so that 90% to 100% range.
Pending the battle.
Speaker Change: That order timeframe, but in the meantime, we're going to default to stop the fundamentals that we can control.
Speaker Change: Thanks ill circle back with any follow ups.
Speaker Change: Great. Thanks, Dan.
Speaker Change: Thank you.
Kimberly K. Ryan: Thank you. At this time, we've reached the end of the question and answer session, and I'll turn the call over to Kim Ryan for closing remarks.
Speaker Change: At this time, we've reached the end of the question and answer session I'll turn the call over to Kim Ryan for closing remarks.
Kimberly K. Ryan: Thanks again for joining us on the call today. We appreciate your ownership and your interest in Hillenbrand. We look forward to talking to you again in August when we will report our fiscal third quarter results. And we wish you all a great week and a great day. Thank you.
Kimberly K. Ryan: Thanks again for joining us on the call today, we appreciate your ownership and your interest in Hillenbrand, we look forward to talking to you again in August when we will report our fiscal third quarter results and wish you all a great week and a great day. Thank you.
Operator: This will conclude today's conference. You may disconnect your lines at this time, and we thank you for your participation. And have a wonderful day.
Speaker Change: This will conclude today's conference you may disconnect. Your lines at this time and we thank you for your participation and have a wonderful day.
Speaker Change: Yeah.