Hillenbrand, Inc. (NYSE:HI) Q4 2022 Earnings Call Transcript

Hillenbrand, Inc. (NYSE:HI) Q4 2022 Earnings Call Transcript November 17, 2022

Hillenbrand, Inc. beats earnings expectations. Reported EPS is $1.05, expectations were $1.01.

Operator: Greetings. Welcome to Hillenbrand’s Fiscal Fourth Quarter and Full Year 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. At this time, I’ll turn the conference over to Sam Mynsberge, Senior Director of Investor Relations. Sam, you may begin.

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Sam Mynsberge: Thank you, operator, and good morning, everyone. Welcome to Hillenbrand’s fiscal fourth quarter and full year 2022 earnings call. 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 pro forma comparisons for our segments.

I encourage you to review the appendix and Slide 3 of the presentation as well as our 10-K, which can be found on our website, for a deeper discussion of non-GAAP information, forward-looking statements and the risk factors that could impact our actual results. With that, I’ll now turn the call over to Kim.

Kim Ryan: Thank you, Sam, and good morning, everyone. Thanks for joining us today as we review our fiscal year 2022 performance and provide our outlook to fiscal year 2023. 2022 was a pivotal year for Hillenbrand, and we made significant progress in executing our strategy to grow as a world-class global industrial company with a portfolio of highly engineered, mission-critical processing technologies and solutions and leading global brands that serve customers throughout the lifetime of our equipment. In our Q1 earnings call, which was my first after officially taking over as CEO, I communicated several key priorities for the year. First, to ensure our company culture, values and working norms were aligned to the needs of the evolving workforce.

Second, to successfully complete the Milacron integration, and finally, to drive continued growth for Hillenbrand through innovation, new product development and strategic acquisitions. We made tremendous progress on these priorities, and now I’ll cover some of our highlights. In June, we introduced our company’s purpose, Shape What Matters for Tomorrow, which serves as the foundation of our culture and unites all of our associates around the globe through a shared vision of how we can drive a positive impact in the world through our people, our products and our partnerships. Internally, our associates have taken ownership of our purpose, which they helped to create. It’s been truly inspiring to watch the organization embed this purpose and our unified core values into our culture.

Externally, purpose is demonstrated in our recent acquisition of Herbold Meckesheim and also by the progress we have made in increasing our transparency through additional disclosures around energy, emissions and DE&I, and by forging key partnerships with organizations like the American Heart Association, Girls Inc. and Net Impact, just to name a few of the ways this purpose influences our company. In addition, I recently signed the United Nations Women’s Empowerment Principles as another step in our commitment to advance gender diversity and equality in our company, industry and the broader community. Turning to the Milacron integration. Next week, we’ll reach the end of the third and final year of the integration program. As we announced last quarter, we achieved and have since surpassed our target of $75 million in run rate cost synergies ahead of schedule.

I’m very proud of the commitment our teams displayed as they worked tirelessly in pursuit of achieving our goals and creating significant value for the company. As you know, this integration used the Hillenbrand operating model to build a scalable foundation for functions like finance, IT and HR as well as global engineering and supply chain that is leveraged by the entire enterprise. We believe the HOM is a key success factor that enables us to drive continuous improvement in our existing businesses and accelerated growth and value realization in our acquisitions. Now turning to performance highlights. Despite significant macro headwinds from inflation, supply chain disruptions and foreign currency throughout the year, we achieved record levels for revenue and adjusted EBITDA in our industrial segments in fiscal year 2022.

Our Molding Technology Solutions segment had annual revenue and margin expansion that came in near the high end of our expectations. And while we did see a slowdown in orders in the fourth quarter, largely due to the rise in global macro uncertainty, we are entering fiscal 2023 with a strong backlog. We’re closely monitoring the demand environment as well as the continued zero COVID policy situation in China and are taking appropriate action to protect overall margins. Bob will cover this when he discusses our financial performance and outlook. In our Advanced Process Solutions segment, we entered fiscal 2023 with another record level of backlog, providing us confidence and visibility in this uncertain operating environment. As discussed last quarter, we saw some delays in customer decision timing, but finished strong with a record Q4 order performance on an FX adjusted basis.

And we continue to see solid order pipeline for our large plastic systems, aftermarket parts and service and our food recycling applications. Last month, several of our teams across APS and MTS attended the K Fair in Dusseldorf, Germany, the world’s largest plastics convention. Each of our participating businesses saw a significant amount of lead and quote volume coming out of the show, which is a testament to the strength of this industry as evolving trends around durable plastics and especially sustainability provide a tailwind for long-term demand in both our MTS and APS segment. In particular, we have received considerable interest in the expanded recycling capabilities we can now bring to the market as a result of our acquisition of Herbold Meckesheim.

Herbold is a leader in the front end of the recycling process with technologies that separate, shred, fine grind, wash and dry recycled plastic, which can then be fed through our Coperion feeding and extrusion equipment to be made back into plastic pallets. These plastic pallets can then be extruded or molded into products by our injection molding, extrusion and hot runner equipment, which are all fully equipped to process recycled content to create high quality, more sustainable products. This circularity within the plastics value chain is a perfect example of how our business helps to Shape What Matters for Tomorrow. We’re excited to share more details with you as a Coperion and Herbold teams continue their integration and leverage our combined technologies to create enhanced customer solutions to serve this fast-growing end market.

Now turning to our recent acquisitions in food. Yesterday, in our earnings release, we announced the tuck-in acquisition of Peerless, a premier supplier of industrial food processing equipment, which is expected to close before the end of the calendar year. Together with the Coperion, Linxis Group and Gabler brands, we anticipate our total food and pharma revenue to be over $400 million, now providing meaningful scale and balance to our portfolio. We’re excited about the opportunities ahead of us, from bringing together the complementary technologies across these brands to drive enhanced value propositions for our customers, to the improved operational efficiency we expect to achieve through the deployment of the Hillenbrand operating model.

Since closing the Linxis transaction in early October, our integration teams have been working quickly together and are on track to drive synergy realization. We’re confident in our ability to effectively integrate and improve our combined businesses, as we have proven before through the successful integrations at Milacron and, before that, Coperion. In total, including Peerless, we executed our disciplined M&A strategy to deploy approximately $740 million towards these acquisitions, expanding our position in complementary end markets with attractive, long-term growth characteristics where we believe our highly engineered, mission-critical processing capabilities and engineering expertise create a compelling opportunity to win. We believe these actions position Hillenbrand for continued long-term growth and shareholder value creation.

Finally, before I turn the call over to Bob to cover our financial details and outlook, I want to touch briefly on the status of Batesville’s strategic alternatives review. The process remains ongoing, and we are confident the final outcome will be the best result for our associates, our customers and our shareholders. We will provide additional updates as appropriate. With that, I’ll now turn the call over to Bob to cover our financial performance and outlook.

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Bob VanHimbergen: Thanks, Kim, and good morning, everyone. Turning to Slide 6. As a reminder, throughout my section, I will be discussing our performance compared to the prior year on a pro forma basis, which has been adjusted for the divestitures of ABEL, Red Valve and TerraSource Global from the Advanced Process Solutions segment. We believe this view provides a clear assessment of our performance, and you will find a reconciliation of reported and pro forma results in the appendix of the earnings slide deck. In our fourth quarter, we delivered revenue of $750 million, an increase of 1% compared to the prior year, or 7% excluding the impact of foreign currency exchange. This growth was led by pricing and higher volume in our Molding Technology Solutions and Advanced Process Solutions segments, partially offset by lower volume in Batesville.

Adjusted EBITDA of $135 million decreased 3%, but increased 3% excluding the impact of foreign currency exchange as favorable pricing and productivity improvements, along with higher industrial volume, more than offset inflation, lower Batesville volume and an increase in strategic investments. Adjusted EBITDA margin of 18%, decreased 80 basis points primarily due to the dilutive effect of price cost and lower volume in Batesville. We reported GAAP net income of $57 million or $0.81 per share, an increase of 9% compared to the prior year. Adjusted earnings per share of $1.05 came in slightly above the high end of our expectations and was $0.05 or 5% higher than the prior year as favorable pricing, productivity, higher volume in our industrial segments and lower shares outstanding were partially offset by inflation, lower Batesville volume and the impact of foreign currency exchange.

The adjusted effective tax rate in the quarter was 27.9%. We had cash flow from operations of $97 million in the quarter, an increase of 13% year-over-year, primarily due to higher customer advances and timing of cash paid for taxes, partially offset by an increase in inventory. Capital expenditures were $18 million in the quarter, which was in line with expectations. Now moving to segment performance on Slide 7. APS revenue of $328 million was approximately flat compared to the prior year, but up 11% excluding the impact of foreign currency, primarily driven by favorable pricing and higher volume of aftermarket parts and services. Adjusted EBITDA of $69 million decreased 1% year-over-year, but increased 9% excluding the impact of foreign currency, as pricing and productivity improvements and higher volume were partially offset by inflation and strategic investments.

Adjusted EBITDA margin of 20.9% was essentially flat as the dilutive effect of price cost mostly offset productivity and operating leverage from higher volume. Record backlog of $1.4 billion increased 6% compared to the prior year or 22% excluding the impact of foreign currency, driven by strong order volume for large plastic projects, record aftermarket orders and the acquisition of Herbold. Looking forward, as Kim mentioned, the project pipeline remains healthy as we continue to see good demand for our leading products and solutions across the key end markets we serve. Turning to Molding Technology Solutions on Slide 8. Quarterly revenue of $276 million increased 6% year-over-year, or 11% excluding the impact of foreign currency, primarily driven by favorable pricing and higher volume for injection molding equipment.

Adjusted EBITDA of $60 million increased 11% compared to the prior year, or 16% excluding the impact of foreign currency exchange, while adjusted EBITDA margins of 21.6% increased 100 basis points as pricing and productivity improvements and operating leverage from higher volume more than offset inflation. Backlog of $364 million was essentially flat compared to the prior year or up 3% excluding the impact of foreign currency and still remains at historically strong levels. As Kim mentioned, order volume slowed in Q4 due to a delay in customer decisions resulting from the increasing macro uncertainty. We expect these customer delays to negatively impact orders and revenue through at least the first half of fiscal 2023, which I’ll discuss further when I cover our outlook.

In response to the slowdown in orders in our MTS segment, we have taken measures towards containing discretionary costs, only hiring for critical roles and a prioritization of key investments. Additionally, our Global Supply Management organization remains focused on optimizing our global supply chain costs, while the continued deployment of the Hillenbrand operating model drives further operational efficiencies, particularly within our injection molding product line. Now turning to Batesville on Slide 9. Compared to the prior year, revenue of $146 million decreased 6% due to lower burial casket volume, resulting from an estimated decrease in deaths associated with the declining effects of the COVID-19 pandemic, and an estimated increase in the rate at which families opted for cremation.

This decrease was partially offset by the price surcharges implemented earlier in the year to offset the significant increase in commodity costs. Adjusted EBITDA of $24 million decreased 28%, and adjusted EBITDA margin of 16.6% declined 500 basis points due to the dilutive effect of price cost and lower volume. Margin in the quarter came in below expectations, but we still anticipate the normalized margins for this business to be approximately 20%, as we have communicated previously. Now I will briefly cover full year results on Slide 10. Consolidated revenue of $2.94 billion increased 5% over the prior year, or 9% excluding the impact of foreign currency exchange. APS revenue of $1.27 billion increased 8%, or 14% excluding currency exchange.

And MTS revenue of $1.05 billion grew 5%, or 8% excluding currency exchange. Batesville revenue of $626 million was roughly flat year-over-year, largely due to the commodity price surcharges which offset lower volume. Total backlog of $1.76 billion increased 5%, or 18% excluding the impact of foreign currency exchange, with approximately 75% of the backlog expected to convert over the next 12 months. As we head into fiscal 2023, the macro environment remains challenging, but our business has shown its resiliency and our strong backlog provides us confidence as we move forward. Adjusted EBITDA of $527 million decreased 1% compared to the prior year, but increased 3% excluding the impact of foreign currency, as pricing and productivity improvements and higher volume in APS and MTS were partially offset by inflation, lower Batesville volume and an increase in strategic investments.

Adjusted EBITDA margin of 17.9% decreased 110 basis points, primarily due to the dilutive effect of price cost coverage. Adjusted EBITDA margin for APS of 19.6% increased 10 basis points, while adjusted EBITDA margin for MTS of 20.7% increased 40 basis points. Batesville’s adjusted EBITDA margin of 20.3% decreased 540 basis points due to the dilutive effect of price cost coverage and lower volume. GAAP net income of $209 million or $2.89 per share decreased from $3.31 in the prior year primarily due to the prior year gain of the sale of ABEL. Adjusted earnings per share of $3.93 increased $0.14 or 4% compared to the prior year, as pricing and productivity improvements, higher industrial volume and lower shares outstanding were partially offset by inflation, lower Batesville volume, unfavorable foreign currency exchange, and an increase in strategic investments.

The adjusted effective tax rate for the year was 29.1%. We generated operating cash flow for the year of $191 million, down $337 million compared to the prior year, primarily due to the unfavorable timing of working capital related to large plastic projects, and an increase in inventory due to higher customer demand and supply chain disruptions. While cash flow was lower this year, our three-year average conversion remains at approximately 120% and our underlying working capital processes continue to be healthy, with working capital turns over 8 turns. Looking forward, we’re confident in our ability to average 100% conversion and drive roughly 10 times working capital turns over the long-term. Capital expenditures for the year were $50 million.

While we expect CapEx to be higher in fiscal 2023 due to the catch-up effect of supplier delays we’ve experienced in fiscal 2021 and 2022, we will be actively monitoring the demand environment and prioritize investments accordingly in the case of an increased or prolonged market softness. Now turning to the balance sheet on Slide 11. Net debt at the end of the fourth quarter was $988 million, and the net debt to adjusted EBITDA ratio was 1.8. At quarter end, we had liquidity of approximately $1.1 billion, including $234 million in cash on hand and the remainder available under our revolving credit facility and delayed-draw term loan facility. As we previously announced, we closed the Linxis transaction on October 6. Upon close of the Peerless transaction and including the debt incurred for the acquisition of Linxis, we expect pro forma net leverage to be approximately 2.8, with liquidity of approximately $555 million.

Turning to Slide 12. As you know, we have a proven track record of deleveraging following acquisitions. And with the increase in leverage from our recent acquisitions, we plan to prioritize debt reduction until we return comfortably within our guardrails of 1.7 to 2.7 times net leverage, which we expect to achieve by the end of fiscal 2023. Moving to capital deployment on Slide 13. We returned approximately $266 million to shareholders during the year, with $62 million of that through our quarterly dividends and $204 million through the repurchase of approximately 4.8 million shares, including approximately 900,000 shares for $37 million in our fourth quarter. As we enter fiscal year 2023, we will be focused on reducing debt, while also continuing to make strategic investments for long-term growth and operational efficiency, such as automation, but we will be cautious as we monitor the overall demand environment.

Now let me conclude my prepared remarks with our fiscal 2023 outlook on Slide 14. Our guidance will be on an organic basis, excluding FX impacts, and a total basis, including the acquisitions of Linxis, Herbold and Gabler and the impacts of FX. We have not yet closed the Peerless transaction, but do not anticipate it to have a material impact on our guidance. As a basis for our outlook, we enter the year with record backlog and continued strength in our APS segment, including strong momentum in our aftermarket business. However, we expect order and revenue softness for our MTS segment to persist through at least the first half of the fiscal year. But at this time, we are not incorporating a broad-based recession into our guidance. We also expect foreign currency headwinds to be more pronounced in the first half of the fiscal year.

While supply chain disruptions and inflation have moderated slightly, we still expect it to be some time before these issues resolve. We expect full year revenue of $3.3 billion to $3.4 billion, up 11% to 16%, which represents organic growth of 3% to 6%, a contribution from acquisitions of 12% to 13%, offset by a foreign currency headwind of roughly 3%. We’re providing a wide range for adjusted EPS to reflect the potential impacts of the global macro uncertainty. As a result, we expect full year adjusted earnings per share in the range of $4.10 to $4.50, with the second half of the fiscal year expected to be stronger than the first half. We expect free cash flow as a percent of adjusted net income to be approximately 100% for the year, with CapEx of approximately $70 million.

Now to our full year segment outlook. Starting with Advanced Process Solutions, we expect full year revenue to be $1.66 billion to $1.74 billion, up 31% to 37%, representing organic growth of 9% to 13%, primarily driven by continued strength in large plastic projects as well as solid growth in aftermarket revenue. Additionally, we expect a contribution of 28% to 30% from acquisitions, and an unfavorable foreign currency impact of approximately 6%. We expect adjusted EBITDA margin of 19% to 20%. Organic margin is anticipated to be up roughly 60 basis points to 100 basis points. As previously discussed, the acquired businesses are dilutive to segment margins, but we fully anticipate to bring these margins in line over time as we integrate and drive synergy realization to the deployment of the Hillenbrand Operating Model.

We assume relatively normal seasonality throughout the year, with the first quarter being our lowest quarter and fourth quarter being our highest. Turning to Molding Technology Solutions. We expect full year revenue to be down 2% to up 1% including a foreign currency headwind of approximately 2%. Given the strong backlog, we expect moderate growth in injection molding products, while our quicker turn hot runner product line will be more heavily impacted by the current market situation, resulting in a modest decline year-over-year. We expect adjusted EBITDA margin of 20% to 21% compared to 20.7% in fiscal 2022, primarily due to unfavorable mix from a higher proportion of injection molding equipment, which comes at a lower relative margin. As mentioned, we expect a softer first half compared to the second half.

For Batesville, we expect revenue to be down 2% to 4% due to an anticipated decline in burial volume, largely due to the impact of the Omicron variant in the first half of fiscal 2022, which contributed to nearly 300,000 COVID-19 deaths in North America during that period. This volume decline is largely offset by the carryover of the surcharges we implemented starting in fiscal Q2 of last year. We expect adjusted EBITDA margin of 19.5% to 20.5%, down 30 basis points at the mid-point primarily due to lower volume, partially offset by productivity actions. We expect price cost coverage to be relatively neutral for the year. For phasing, we anticipate a tougher year-over-year comparison in the first half, largely due to the decline in volume and higher expected level of inflation.

Now given the macroeconomic uncertainty, we are providing a Q1 guidance range for adjusted EPS of $0.85 to $0.93. This is down moderately from the prior year, primarily due to lower volume in Batesville as a result of the impact of the Omicron variant in the prior year and lower volume in MTS, particularly for high-margin hot runner product line due to customer order delays. This will be partially offset by EPS growth and lower shares outstanding. We expect a contribution of approximately $0.06 from acquisitions in the quarter, net of interest, which is offset by the impact of unfavorable foreign currency exchange. Please review Slide 14 for additional guidance assumptions. Overall, heading into fiscal 2023, we have strong backlog and a solid pipeline within our APS segment, which will help mitigate the order softness we’re experiencing in our MTS segment.

We continue to be focused on investing for growth and delivering world-class solutions to our customers in a variety of growing end markets, while utilizing the Hillenbrand Operating Model to help us navigate through the difficult global environment. Our teams have repeatedly demonstrated the ability to execute through challenging circumstances, and I am confident that we will continue to drive sustainable improvements that will create long-term value for our shareholders, while remaining nimble in deploying our downturn playbook to contain costs in response to a broader market downturn scenario. And now, I’ll turn the call back over to Kim.

Kim Ryan: Thanks, Bob. I’ll end our discussion with a few final remarks before taking questions. We continue to operate in a dynamic and challenging macro environment. As I mentioned, we remain vigilant towards the external environment, and we are taking appropriate action to protect the business in the short-term, while not sacrificing our long-term opportunity for growth. Our backlog remains at record levels, and we remain intensely focused on deploying the Hillenbrand Operating Model to help our teams effectively guide and execute through these challenging global times. Guided by our Purpose, Shape What Matters for Tomorrow, we continue to invest in innovative solutions that help our customers solve their most difficult problems.

And we’re confident that we’re taking the right steps to further position Hillenbrand to drive long-term profitable growth and shareholder value. Finally, we hope to see you at our Investor Day on December 15 in New York City, where you’ll be able to meet key members of our talented and experienced leadership team and members of our Board of Directors, and where we plan to provide further insight into our strategy, our transformation journey, our segments and our targeted performance. We’ll now open the line for your questions.

Q&A Session

Operator: Thank you. At this time, we’ll be conducting a question-and-answer session. Our first question comes from the line of Daniel Moore with CJS Securities. Please proceed with your question.

Daniel Moore: Thank you. Good morning, Kim. Good morning, Bob. Thanks for taking the questions.

Kim Ryan: Good morning.

Bob VanHimbergen: Hey, good morning, Dan.

Daniel Moore: I’ll start with Advanced Process Solutions. Clearly, continuing to see strength. You mentioned record quarter of orders adjusted for FX. I think last quarter you alluded to a couple of large orders. I assume those did close during the quarter. Just checking there and maybe any more color just on the general outlook and pipeline beyond €“ behind the backlog growth that you’re seeing this quarter.

Kim Ryan: Yes, Dan. So yes, we had seen a couple of those trickle in at the beginning of the quarter, and then a few more of the orders, obviously, that we expected executed towards the end of the quarter and that obviously allowed us to achieve those record order levels. We also saw continuing strength of our services business and the order pipeline for that, which was something that we’ve been talking about, as you know, for several quarters and something that we’ve been monitoring. And that obviously comes as a result of a lot of the capital that has been purchased over the last number of years and the subsequent parts annuity that we expect to come from these systems and projects that we’ve put in. In terms of the pipeline, we still feel that, that’s good, robust and stable.

And particularly as we had an opportunity to interact with a lot of our customers at K Fair over the course of the last 45 days, got an opportunity to really explore a lot of the thinking around how our customers are approaching the market and some of these uncertain times, what are some of the projects that they’re still planning on, how are they thinking about continuing investments in the durable plastics area. And as you might imagine, sustainability was a huge focus at K Fair, and so the €“ there was a high degree of interest in the recent acquisitions that we’ve made especially in the recycling space so that we could continue to offer more fulsome solutions to our customers in the areas, whether it’s mechanical recycling, solvent-based recycling, chemical recycling.

We have the opportunity to share the reference lines that we’ve been able to put in, in all of those areas, and how we’re going to be bringing those solutions like with our €“ with this most recent acquisition. So it was very well received. And that’s, I think, a pretty good view of kind of how we see things materializing with APS.

Daniel Moore: Got it. Very helpful. Maybe just switching gears to the MTS side of the house. Just talk about what you’re seeing in real time. You gave great color in the prepared remarks. But as far as kind of sequentially week-to-week, month-to-month, how demand has trended or, I should say, order rates are trending exiting fiscal 2022 and thus far this quarter. It sounds like your kind of setting up for some softness for the next one to two quarters. Just what are you hearing from customers and maybe compare it to prior downturns, if that’s possible?