q1 2024 hillenbrand inc earnings call

Q1 2024 Hillenbrand Inc Earnings Call

q1 2024 hillenbrand inc earnings call

Participants

Sam Mynsberge; VP of Investor Relations; Hillenbrand Inc

Kim Ryan; President and CEO; Hillenbrand Inc

Robert VanHimbergen; Vice President, Corporate Controller; Hillenbrand Inc

Presentation

Operator

Hello, and welcome to the Hillenbrand Q1 fiscal year 2024 earnings call. (Operator Instructions) As a reminder, this conference is being recorded. It’s now my pleasure to turn the call over to Sam Mynsberge, Vice President, Investor Relations Please go ahead, sir.

Sam Mynsberge

Thank you, operator, and good morning, everyone. Welcome to Hillenbrand’s earnings call for our first 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 on today’s call.
Turning to Slide 3. 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 impacts from acquisitions, divestitures and foreign currency exchange. Also, we will be discussing our results on a continuing operations basis, which excludes the discontinued operations of Batesville, which we divested in February of last year. 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’ll turn the call over to Kim.

Kim Ryan

Thank you, Sam. And good morning, everyone. Thanks for joining us on today’s call. Our first quarter performance reflects the dynamic environment we continue to experience in certain parts of our business. Total revenue growth of 18% and adjusted earnings per share of $0.69 were in line with our expectations, led by strong performance from our recent FPM. acquisition and our continued success in driving aftermarket expansion. We saw a sequential and year-over-year order improvement within our ATS segment with solid demand for our leading technologies and systems serving the plastics and food processing industries. However, we experienced weaker than expected performance in our MCS segment with continued demand softness across most regions and end markets. Additionally, our cash flow was lower than expected due in part to softer orders within MPS and the continued pushout of large project orders within APS and the corresponding customer advances, which contributed to our leverage being slightly higher than expected.
While exiting the quarter. We’re not pleased with this current level of performance. So as we announced in our press release yesterday, we are responding by executing significant cost actions to optimize our MTS cost structure, including headcount reductions and footprint rationalization. We’re confident these actions will not only strengthen our position within the current environment, but also ensure we’re able to respond with higher levels of growth and profitability when demand recovers, we expect these actions will deliver annual run rate cost savings of $15 million, with approximately 50% of that to be realized within the current fiscal year, which will help mitigate the demand headwinds within the MTS segment. Bob will discuss this further in a moment when he gets an update on our financial performance and outlook.
I’ll now provide a little more color on the end market dynamics we’re seeing across both segments. Starting with MTS. As I mentioned, we continued to see a challenging demand environment in the quarter with overall orders down both year-over-year and sequentially on the back of broad-based softness led by weakness in consumer goods and electronics. While we anticipated volumes to be down due to lower starting backlog. Performance came in below what we expected, particularly for orders and margins. We did close a few larger projects in January, but we’ve yet to see a meaningful improvement in the overall trajectory of market demand as customer investments remain pressured by elevated interest rates, low machine utilization and uncertainty in consumer consumption patterns, we continue to focus on controllable factors inside the business as we navigate this difficult external environment as evidenced by the meaningful cost actions we’re taking.
Now turning to APS, starting with durable plastics. We were pleased with the healthy order demand for our large extrusion and material handling systems in Asia and the Middle East. Though the timing of customer decisions continues to be lumpy. While global macroeconomic factors are contributing factor to these delays, we’ve also seen the size of projects in both virgin plastics and recycling increased significantly, which in turn requires a longer relative quoting process. However, we also believe this trend is competitive advantage for us as our equipment systems are optimal solutions for high output requirements.
Lastly, as we expected coming into the year, we are starting to see improved lead times, both from our suppliers and as a result of HOM. initiatives, which should allow us to convert our high backlog more efficiently going forward.
Turning to food, we’re excited to have FPM. in the portfolio for a full quarter as our teams remain energized as they execute integration plans and go to market as a leading global provider of food processing technologies and integrated solutions. The breadth of our geographic footprint and the technology offering enables us to be a world class solutions provider across the applications we serve, including baked goods, pet food stacks and cereals and many more. We continue to see solid order patterns and customer quote activity across most key applications and we remain excited by the growing pipeline of opportunities we see as a result of our enhanced portfolio.
Our integration activities focused on both cost and commercial opportunities continues to progress as expected. While we certainly face a dynamic and often challenging macro environment, I remain confident in our ability to execute our objectives through the remainder of the year as we deploy the Hillenbrand operating model to drive synergy realization, productivity and working capital initiatives across the enterprise.
With that, I’ll now turn the call over to Bob to provide more details on financial performance and outlook.

Robert VanHimbergen

Thanks, Kim, and good morning, everyone. Turning to our consolidated performance on slide 5, we delivered revenue of $773 million, an increase of 18% compared to the prior year, primarily due to the acquisition of SPM. On an organic basis, revenues decreased 7% year over year, primarily driven by lower volume TS., which we largely anticipated due to the lower starting backlog coming into the year. Adjusted EBITDA of 114 million increased 13%, but decreased 14% organically as lower volume and cost inflation more than offset favorable pricing, productivity and product mix.
We delivered adjusted EBITDA margin of 14.8%, a decrease of 60 basis points over the prior year. We reported GAAP net income of $18 million, down from 25 million in the prior year as the impact of the SPM acquisition was offset by lower organic volume cost inflation higher interest expense, a pension settlement charge and a higher effective tax rate. Adjusted earnings per share of $0.69 decreased $0.01 or 1%. Our adjusted effective tax rate in the quarter was 28.6% in line with expectations, but up 360 basis points compared to the prior year, primarily due to the non-repeat of the China technology tax incentive we received in Q1 last year. Our cash flow from operations represented a use of 24 million in the quarter, which was $18 million unfavorable compared to the prior year, primarily due to lower earnings and the timing of working capital requirements.
Capital expenditures were 12 million in the quarter and we returned approximately $60 million to shareholders through our quarterly dividend. Historically, Q1 is a lower relative cash flow quarter for Hillenbrand, but cash performance was below our expectations this quarter in part due to softer order performance. However, we maintain our expectation that cash conversion will be approximately 90% for fiscal 2024, which includes the impacts of restructuring and integration related cash benefits that we expect to realize in the year, our longer-term goal remains at 100% free cash flow conversion.
Now moving to segment performance, starting on Slide 6. Revenue of $568 million increased 38% compared to the prior year, primarily driven by FPM. organic revenue modestly decreased by 2% year over year as lower capital volume was partially offset by higher aftermarket parts and service revenue. While revenue came in slightly below our initial expectations, primarily due to timing of some larger orders, we still see healthy levels of demand to support our full year organic growth. Adjusted EBITDA of $96 million increased 35% year over year, but decreased 3% organically as lower volume and cost inflation more than offset favorable pricing, productivity and product mix.
We delivered adjusted EBITDA margin in the quarter of 16.9%, which was down 40 basis points over the prior year, primarily due to cost inflation and the dilutive effect of the recent acquisitions. As we’ve communicated, we expect to improve the acquisition margins towards historical EPS segment levels over the next few years as we achieve synergies and deploy the Hillenbrand operating model to drive continuous improvement.
Backlog of $1.9 billion increased 18% compared to the prior year driven by FDM, but decreased 5% on an organic basis. Sequentially, backlog was up 3%.
Now turning to MTS on Slide 7. Revenue of $205 billion decreased 16% year over year due to lower volume of injection molding and hot runner equipment. This was largely anticipated given the lower starting backlog entering the year, but we did see weaker than expected performance from our hot runner product line at the end of the quarter. Adjusted EBITDA of $32 million decreased 26% due to lower volume and cost inflation.
Adjusted EBITDA margin of 15.7% decreased 200 basis points compared to the prior year, largely driven by the impact of lower volumes, particularly within our higher margin hot runner product line. As Kim highlighted, we’re launching a restructuring program in our MTS segment in order to improve operational efficiency and optimize our cost structure for the current environment, while also ensuring we remain poised for growth once market conditions improve, we expect to incur restructuring charge related to these actions of approximately $20 million in the year of annualized run rate savings of approximately 50 million by 2025. We’re estimating approximately 50% of the run-rate savings to be achieved in the current year, which I’ll cover a bit more when I discuss our outlook for the remainder of the year. Backlog of $232 million decreased 31% compared to the prior year but was flat sequentially. While order volumes had been relatively flat throughout fiscal 23, we saw further dip in injection molding orders in the quarter beyond what we had anticipated as Kim mentioned, we did see a few large projects come through in January, but we do not yet believe this is necessarily a sign of broader improvement in the underlying market conditions.
Now turning to the balance sheet on Slide 8. Net debt at the end of the first quarter was $1.8 billion and the net debt to adjusted EBITDA ratio was 3.4. At quarter end, we had liquidity of approximately $650 million, including about 200 million in cash on hand and the remainder available under our revolving credit facility. While our ending leverage was up sequentially from 3.2, this was partially anticipated due to the regular seasonality of our cash flows. However, we did see additional unfavorability due to the lower than expected cash flow as well as an unfavorable impact at the end of the quarter from first currency exchange.
Moving to our capital deployment priorities on Slide 9, our capital deployment priorities are unchanged as debt reduction remains our top priority. Given the Q1 performance and uncertainty in the pattern of orders and working capital requirements, we now expect to return to our preferred net leverage range of 1.7 to 2.7 by Q2 of fiscal 2025, slightly delayed from our previous goal of Q1 2025, we are aggressively pursuing additional cost and cash synergies, so accelerate our progress towards this timeframe.
I’ll wrap up with our outlook for the remainder of 2024 and slide 10. We are maintaining our total company guidance range for the fiscal year, but expect to be towards the lower end due to weaker MTS performance, partially offset by approximately 8 million in restructuring savings expected to be realized in the year. As a reminder, our guidance ranges for total Hillenbrand are 3.28 to 3.44 billion for revenue, 530 to 588 million for adjusted EBITDA and $3.60 to $3.95 for adjusted EPS, reflecting solid organic growth in our APS segment and significant inorganic contribution from the FPM acquisition. For Q2, we are targeting adjusted earnings per share in the range of $0.71 to $0.76, which is relatively consistent to the prior year as the contribution of FPM. and modest organic growth in EPS as largely offset by a significant decline in MTS as the prior year was a record quarter for MTS.
Please review Slide 10 for additional guidance assumptions. In summary, as we look forward to the balance of the year, we continue to see a solid pipeline of demand in our APS segment, and we’re confident the cost actions we’re taking will help mitigate the market challenges within our MTS segment.
With that I’ll turn the call back over to Kim before taking questions.

Kim Ryan

I’ll end our presentation this morning with a few final remarks. We remain laser focused on deploying the Hillenbrand operating model to execute our integration and synergy plans, capitalize on innovation and other organic growth opportunities, improve our working capital metrics to drive cash flow and debt reduction and take the appropriate actions to protect our margins as we navigate this dynamic macro environment. I’m all the more convinced in the strategic actions we’ve taken over the last two years in transforming Hillenbrand to leverage our technological capabilities by expanding into higher growth, less cyclical end markets that are supported by long-term secular growth trends. We’re well positioned for the future as our teams are energized to serve our customers with world-class solutions as a global leader of highly engineered process technologies and systems united by our purpose to shape what matters for tomorrow.
I will now open your line for questions.

Question and Answer Session

Operator

Thank you. (Operator Instructions) Matt Summerville, D.A. Davidson.

Thanks. A couple of questions. Maybe just starting with APS. Can you put a little bit more context around the funnel within that business some of the key metrics you’re tracking and how they look maybe versus a year or two ago? And if the order activity level you saw in Q1 is maybe an early indication that some of that log jam, if you will, may be moving in the right direction.

Kim Ryan

And then I have a call and yes, so I would say in the APS business. We have a very detailed funnel process that we have for each of the businesses and especially given the duration of some of those unquote processes, it’s really critical that we have different milestones to make sure that we understand whether or not those are progressing everything from what types of resources are we putting in what types of resources that the customer is putting into to move these quotes ahead.
What I would say is that we continue to see a a very, very positive demand for quotes and for work to be done in the regions that we had previously mentioned to you, that was being Middle East and China and India and have even continued to see some progression in other markets as we look forward to the remainder of the year in Europe and Africa and even some specific projects not in North America. So we remain very encouraged about the or the quoting pipeline that we have and what we have seen a couple of orders crossover in in early January, we kind of have a saying here. Is it a is it a DOT, is it aligned? Is that the trend at this point?
I’d say it’s a adopt progressing to a line. So I think we are we are encouraged that we continue to see things moving ahead and moving through that pipeline in terms of how we assess orders and the outlook that we have for generally, most of the geographies we’re doing business and we continue to be very excited about what we see both on the plastic side as well as on the food side because remember, although we’ve been very focused on cost synergies, on food. We’re also very focused on creating commercial opportunities across these businesses as well. So hopefully, that addresses your questions, Matt?

Yes, thanks. And then just a follow-up on you mentioned or Bob mentioned that MTS experienced a little bit of an incremental dip in orders following a couple of quarters. I thought of stability what end market geography come and is driving that incremental dip? And then can you elaborate on the magnitude of headcount and the reduction you’re looking at as well as how you are rationalizing the footprint within MTS?

Kim Ryan

Yes, I would say that we had anticipated the you know, we had seen several quarters of where we were. We were pretty flat in terms of the order demand. So while we were hoping for an uptick. We had at least seen stability. We saw a little bit of a dip in the last quarter, specifically in the areas of consumer goods electronics, some of those areas which have typically been strong and we have not seen the bounce back in China in North America that we might have anticipated at this point. There continues to be a lot of fighting for volume in that space, both in the injection molding and the hot runner side of the business.
So that is that’s one of the areas that tap that has given us a little concern, and that’s caused us to move ahead with some of the things that we needed to do from a from a cost standpoint and keep in mind that as we go through this, we are always planning for the future. And so I would say that we are making decisions that are appropriately sized for the demand trends that we’ve seen. And we are that are also taking into consideration where we expect the demand to return so that we can be prepared for that at this allows us to look at everything from creating flexibility in the way we manufacture our goods, leveraging leveraging partners, leveraging some of our suppliers to help with volume as we would want that to return. So the magnitude of that ends up being in kind of best 5% of of workforce type at type size.
And then we anticipate there are a couple of opportunities for cost rationalization and simplification from a site perspective that we will also be engaging in and at it’s Keep in mind we’ve got and we’ve got new eyes on that business I think that we’ve got a lot of work that has been done over the last four months in collaboration with the leaders in that business. And we all agree that these are appropriate actions to take it with that create an appropriate return. Even though we’ve got some one-time charges associated with that and that they will not hamper our flexibility too address volume as it comes back in this market, which it has always historically done.

Operator

Daniel Moore, CJS Securities.

Morning, Bob. Can you dig a little deeper into the trends in APS. First, you mentioned some of the opportunities you’re seeing in petrochem and plastics are on the large, you know, very larger, larger side of those, primarily Middle East. Just talking about sort of geography as well as that timeframe and what on ultimate kind of margin profile of those? Slightly larger? Typically larger projects look like?

Kim Ryan

Sorry, and the polyolefin side, I mean there is some buyout associated with those projects, but those projects are in places that we’ve indicated before. They’re Middle East there, China or India. And in terms of the really large polyolefin projects. And that’s that’s those are the places where we’ve been strong quoting activity. We’ve been kind of waiting on order decisions we expect over the next 12 months. Those for those to continue to be strong.
The margin profiles that, you know, those are we feel very good about our ability to create value in those, especially as we’re able to create it more than just individual pieces of equipment offerings. We’re able to create full systems. We are able to create value for customers and for ourselves as we’re able to optimize those systems into those into those lines. And given that a lot of the folks developing in those areas are our multinational customers, those are relationships that we feel very confident about in terms of in terms of being able to provide full solutions. So those are some of the areas that we’re seeing on the big on the big polyolefin jobs.

Very helpful. And on the food and pharma side, when you put all of that businesses together as you integrate them, if we think about sort of a pro forma order rates and the pipeline or funnel this time relative to maybe 12 months ago?

Kim Ryan

And where would you say kind of we are overall year over year on a pro forma basis, what you at so obviously, we didn’t have that PM in our in our portfolio a year ago. But when you look back at what you’ve made performs under that ownership and then obviously with our legacy food health and nutrition business. And then Linx’s orders actually on a year-over-year basis came in pretty strong, specifically within food. And so we feel good about no long-term investments that the long-term view of that business, we feel great about short term and that growth again in that business as we invested that food end market, we see that growing at GDP-plus and everything we’ve seen here so far indicates that no, we made the right decision in those investments.

Yes, we feel we may do feel very I mean, I had an opportunity to meet with the commercial teams on this two weeks ago, I guess it was still feels like forever, but we had an opportunity to listen to our report out from these teams two weeks ago on all the opportunities they’re seeing across the portfolio. And really when you think about what we’ve brought together here that feeding the additive ingredient handling the pneumatic conveying the the multiple conversion steps, whether it’s mixing, whether it’s extrusion, whether it’s very high end extrusion or or less complex extrusion, the material handling, again, in the end of line processing and the storage capabilities that we have through all of the assets that we acquired. And this is really going to be an exciting portfolio to be able to offer into the marketplace. And we’ve got the addition of having the Shanghai team join us, which has a lot of experience in managing the larger projects. So as we’re able to work these projects into the market. We’ve got a ready and experienced team that can work hand-in-hand with us to be able to take these projects to fruition. I can tell you the team is really thrilled about the opportunities they’re seeing. And frankly, they are running as fast as we will let them on finding ways to collaborate together. And it’s really invigorating to see.

Excellent. And just shifting gears to Mt, I guess two questions. First, do you have much visibility or line of sight as to when you may see kind of a bottom in terms of orders, I know that’s a challenge given hot runner business is traditionally short cycle. And second, in the past, it’s been quite cyclical with hot runners, in particular, often rebounding sharply. Do you anticipate that could be the case again this time around? Or has anything fundamentally changed that might make it a little bit more gradual?
What I’m trying to ask, is demand permanently shifted lower? Or is there reason to believe that eventually we’ll get back to the levels that we saw a couple of years?

Kim Ryan

Well, I think I’ll just hit some macro trends in the market that I think I think will, but I think are noteworthy. So as it pertains to kind of that demand bouncing back, I think that China has always been a very leading indicator of that, and that has been that market has been a bit slower and has not bounced back as quickly as we would have anticipated parts of that are, I think some uncertainty in the geopolitical environment. Parts of that are as some customers, some manufacturers making choices about, hey, do I want to have my entire footprint sitting in China? Or should I diversify my footprint into areas like India?
As you know, we have locations in India, which are and we are offering the same types of capabilities and turnaround time lead times engineering capabilities to the customers that we serve in China. So we believe that we are well positioned to be able to catch that catch that business as it moves into other geographies in Asia. So we do feel prepared for that. But I would say that there are there is some slowness in it in the final decisions being made about where that footprint will reside. And I would also say that given some of the slowness that has that has characterized this industry for this end market for the last period of time. I think there is a lot of there is a lot of volume that’s trying to find a home. And so I think that does create a lot of pricing pressure margin pressure at this time as people work to we maintain coverage for their own fixed costs in an environment where the market is kind of undersized for the competitive footprint that sits there right now. And I’ll turn it to Bob to hit some of the other points.

Robert VanHimbergen

Yes, I think you actually summarized it. Welcome. You know, then you think about the MTFs market overall in our in our view of the first quarter, things were actually pretty on par for the first couple of months. And then December is where we saw that a bit deeper depth than what we anticipated. Now January, we actually had a little bit little bit of upside compared to what we thought right now we’ve been here before, and as Kim said, those are dots not not a line or a trend yet. So you know, you think about past cycles, CMTS cycle spend down in, I’ll call it five, six quarters is what that cycle looks like. And we’ve projected about eight in our guidance and it is a short-cycle business. So I think we’re doing the right thing with the restructuring, when the market does return, we feel confident that we can take advantage of our position even in light of a reduced workforce.

Helpful. Last one I’ll jump out just obviously, given what’s the kind of lingering softness in MT. and Q2 guide being a little lighter than at least we’d expected on the would you say the lower end of the full year guidance range is more likely from an EBITDA and adjusted EPS perspective? Or are the cost reduction actions you’re taking enough to kind of balance it out, it makes the full year picture more balanced relative to where are you thought coming into the year?

Kim Ryan

Yes, starts out. So we feel good about where APS cents within our guidance range at that midpoint down and on the MTS side, probably on the lower end. And as you recall, when we gave guidance a couple of months ago, we did have a wider range, just in case we didn’t see that snap back. We were thinking a modest recovery in MTS, and I still think that’s on the table. But again, Q1 is a little bit lower than what we anticipated. So we’re expecting the lower end of the guide on the MCS piece. And obviously, the average of APS and MTS would put us at the lower end of the from the overall guidance. And then on the restructuring, that does embed the the savings from the restructuring actions. So net-net, we’re going to be at the lower end on MTS.

Operator

John Franzreb, Sidoti & Company.

Good morning, everyone. And our second question, Tom Kim, in your response to the last question, you mentioned the pricing environment’s gotten more challenging. I’m curious if that’s limited to China, which had been the case, if I remember correctly? Or is that spread to other geographies?

Kim Ryan

No, I think that I think the geographies are I think we’re seeing that in a number of in a number of regions?

I’ll let Bob comment a little bit further on some of the details about.

Robert VanHimbergen

So Kim and John So we’re seeing pricing pressure really across all regions, particularly in MTS customers in North America become and certainly price sensitive. And therefore, we need to react to really maintain our share same thing in China. We’re seeing aggressive discounting in that region as well. So the thing about MTS., we’re likely going to be less than 1% price cost covered However, APS, we’re going to be above 100%. And so net-net Hillenbrand, we will be still price cost favorable at the consolidated level.

Got it.

Understood. And Bob, I think you said in your book, you said in your prepared remarks that APS had, uhm, some delayed shipments in the quarter. I’m curious what was the magnitude of those shipment delays and had they been shipped in the first quarter? I’m sorry, India sort of order?

Robert VanHimbergen

Yes. So we don’t just a little bit just timing on some parts, quite honestly, John, so we can ship those large orders was about 5 million of an impact in the quarter and the others. Those will go up Q2.

Now, Kim, I’m curious about what your thoughts are on APS on backlog, which kind of elevated so on, is it actually a hindrance at some point in time all the time you maybe might not have needed. Just maybe some thoughts at a high level that the APS backlog.

Kim Ryan

Yes, I would I would say that it it’s a bit it’s a bit elevated for what would be most optimal. When you’ve got a lot of backlog, you’ve got to touch and retouch things a couple of more times than you would like, but it. But at this point, frankly, I’ll take the orders and we’ll work through the backlog and we’ll also continue to manage that. You know, the team has.
I would say that this is when you look historically at the level of backlog that we would typically operate this business on, we are at an exceptionally elevated level to what we used to eat out years ago.
Sorry, I’m getting some feedback, what we used to do in terms of regular backlog level, I would say we’re in the neighborhood of 50% to 75% higher than than what we would than what we used to operate at. But our lead times are longer from suppliers still there’s that’s that’s a factor. And the amount of the amount of large orders in the backlog has continued to increase over time.
And I think that that’s a direct reflection of the value proposition that we’ve been able to take into the marketplace, especially in that polyolefin arena. And I do think that the attractiveness of the portfolio and being able to be a systems provider in certain applications has a real attractiveness for customers and having one vendor that really understands how to optimize all of that and bring it together for best performance in their in their manufacturing locations. And so a bit of that as a reflection of the fact that we don’t do, we don’t just sell equipment. We do sell systems and that has increased over the last couple of years. So a little higher than than might be optimal. But again, I’ll take it every day.

Operator

We’ve reached the end of our question-and-answer session. I’d like to turn the floor back over to Kim for any further or closing comment.

Kim Ryan

Great. Thanks again for joining us on the call today. We appreciate your ownership and interest in Hillenbrand and look forward to talking to you all again in May when we report our fiscal second quarter results. Have a great day. Thank you.

Operator

That does conclude today’s teleconference and webcast. You may disconnect your line at this time and have a wonderful day. Thank you for your participation today.

Source

Leave a Reply

Your email address will not be published. Required fields are marked *