HI - NYSE

Greetings and welcome to the Hillenbrand’s Fourth Quarter Fiscal Year 2024 Earnings Call. At this time, all participants are in a listen-only mode. The question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce Sam Mynsberge, Vice President, Investor Relations. Thank you, you may begin.

Thank you, operator, and good morning everyone. Welcome to Hillenbrand's fourth quarter and fiscal year-end 2024 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, please note 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 our results on a continuing operations basis, which excludes any impact from the discontinued operations of Batesville as well as certain non-GAAP operating performance measures, including organic comparisons for our segments, which exclude the impacts from acquisitions, divestitures, and foreign currency exchange rates. I encourage you to review the appendix in Slide 3 of the earnings call presentation, which can be found on our website as well as our 10-K which will be filed later this month, for a deeper discussion of non-GAAP information, forward-looking statements, and the risk factors that could impact our actual results. Finally, as a reminder on August 1st, Schenck Process Food and Performance Materials business was rebranded under our existing Coperion brand, but will be referred to as FPM throughout today's call. With that, I'll now turn the call over to Kim.

Thanks, Sam and good morning, everyone. Thank you for joining us today. I'd like to start by recognizing our Hillenbrand associates for their dedication and determination throughout the year. While we face demand pressure from persistent macroeconomic challenges, our teams rose to the occasion by accelerating initiatives to optimize our cost-structure and drive trade-working capital efficiencies, by diligently managing our discretionary costs, and by delivering stronger than planned FPM margins through the execution of our integration. Guided by our purpose to shape what matters for tomorrow, we continue to pursue excellence, collaboration, and innovation for our customers, our colleagues, and our communities. And I'm truly grateful for a team that embodies that purpose each and every day. As we've completed our first full year as a pure-fly global industrial company, we remain confident about our future. Throughout our transformation, we've established a portfolio of leading brands and highly engineered processing technologies, serving large and attractive end-markets with long-term growth that's driven by an expanding global middle-class and an increasing focus on sustainable solutions. The breadth of our product offering, world-class applications engineering and process technology expertise, and exceptional systems integration capabilities, enable us to offer compelling value propositions to our customers. We are able to deliver the highest quality and highest output equipment and systems anywhere in the world, and then leverage our global network of service professionals to maintain, upgrade, and modernize this equipment to maximize its value for our customers throughout its life cycle. This fosters strong enduring partnerships and positions us as a preferred and trusted supplier for our customer's future needs. While demand for large polyolefin systems and aftermarket parts and service was robust for the year, orders from mid-size equipment were more challenged than originally expected as uncertainty around inflation, interest rates, geopolitical events, and global economic activity slowed capital investments. Project quoting pipelines remained very active and test labs remain full, but many of our customers significantly delayed their capital investment decisions across several key end markets. In response, we executed a number of strategic initiatives during the year to help mitigate the impact to the bottom line. We will continue to evaluate and implement additional actions as necessary until the demand environment normalizes. Now, touching on our Q4 performance, we delivered revenue of $838 million, up 10% in total, but down 1% organically, though this reflects an improvement from prior quarter. This was slightly above our expectations coming into the quarter, supported by another record level of aftermarket performance. Teams in both segments also did an excellent job executing orders from backlog. With the incremental volume and continued cost discipline, our adjusted earnings per share of $1.01 was just above the high end of our previous guidance. Additionally, our ongoing focus on working capital and cash optimization resulted in $167 million of operating cash flow in the quarter, allowing us to reduce our leverage to 3.3 times, down sequentially from 3.5 times. This underlines our stated priority of debt pay down. For the full year, consolidated revenue increased 13%, primarily driven by the FPM acquisition and strong aftermarket growth. Organically, total revenue was down 5%. Organic revenue in our Advanced Process Solutions or APS segment was down 2%, reflecting customer decision delays on capital equipment orders, which more than offset record aftermarket performance. Revenue in our Molding Technology Solutions or MTS segment declined 11% primarily driven by lower backlog, entering the year for our injection molding equipment and ongoing soft demand for hot runners globally, but particularly within North America. While we remain cautious in our demand outlook over the near term, I'm pleased with our teams executed to finish the year. I'll now provide a little more color on the factors driving performance in each of our segments. Starting with MTS, we were pleased to see orders improve once again on both year-over-year and a sequential basis in the fourth quarter, primarily driven by injection molding equipment demand. Although this progress is encouraging, we have not yet seen enough demand growth to call this an inflection in the overall market. India, where we are a leading provider of injection molding equipment, continues to perform well. And China hot runner demand improved year-over-year and sequentially for the second consecutive quarter, though it remained low relative to historical levels. As I mentioned, we saw pockets of increased investment in the quarter for injection molding equipment in the U.S. and India, however, hot runner demand continues to be relatively flat globally. Our fiscal 2025 outlook for MTS assumes demand will remain relatively consistent with 2024. We expect relatively stronger injection molding performance, which comes at a lower relative margin and continued price cost pressure is expected to partially offset productivity and the incremental $12 million of benefits from the previously announced restructuring program. In addition, we will continue to be disciplined on all discretionary costs. Turning to APS, orders were up sequentially this quarter, but overall capital equipment demand remained soft for mid-sized equipment, though generally in line with what we expected coming into the quarter. As I mentioned, coal pipelines and test lab demand remains robust, but we have experienced significant delays in customer decisions throughout the year across key end markets, such as engineering plastics, recycling, pet food, and other specialty materials. As a result, backlog is down year-over-year and given the longer lead time nature of projects in APS, this is expected to put pressure on revenue performance in fiscal 2025. But generally in line with the expectations we discussed on last quarter's call. Capital equipment investments remained subdued during the year, but we continued to see solid demand for aftermarket, particularly for larger modernization projects. And we're making great strides in driving aftermarket performance within our newer food businesses. Our focus on aftermarket, coupled with the strength of our install base, resulted in consecutive years of double digit organic expansion in aftermarket. While we expect growth rates to moderate going forward, we anticipate this more stable, highly profitable part of our business will continue to perform well in 2025. Finally, a key focus area this year has been the continued execution of our integration program, which progressed well throughout the year. We are pleased by the enhancements we've made across the combined food, health, and nutrition portfolio, including alignment of go to market strategies, standardization of pricing practices, and approved operational efficiencies as exemplified by the strong margin performance, we've delivered in this part of the business. We remain on track to achieve our $30 million run rate cost savings and with significant portion of that already realized, we have additional opportunities still ahead of us. While lower backlog coming into the year is expected to be a headwind in 2025, we continue to focus on accelerating initiatives around cost structure optimization, strategic pricing, and targeted commercial opportunities. We remain very confident in the strategic fit of these assets, as we leverage our systems expertise, global footprint, and operating model capabilities across the APS segment. We believe there is a clear path to achieving continued margin expansion and solid top line growth once the demand environment normalizes. Now, before I turn the call over to Bob, I'd like to highlight some recent updates related to our Board of Directors and our sustainability disclosures. We are committed to the development of our Board and ensuring the skill sets of our Directors align with the strategic direction and priorities of the company. Last month, we announced the election of Joseph Lower to our Board. Joe is a seasoned financial executive with deep skill set in finance operations, strategic planning, capital markets, and business development. We are excited for Joe to join the Board on December 1st and look forward to leveraging his expertise as we work together to deliver long-term value for our shareholders. In addition, we announced the establishment of Vice Chairperson roles for two key committees, the Audit Committee and the Nominating and Corporate Governance or NCG Committee. Given Mr. Lower's extensive financial background, he has been named as the Vice Chairperson of the Audit Committee and current director Inderpreet Sawhney has been named as Vice Chairperson of the NCG committee. Finally, in October, we published our first task force on climate-related financial disclosures or PCFD report. This report demonstrates our continued transparency and sustainability disclosures and progress towards meeting the global regulatory requirements. I'm proud of the team's efforts in achieving this milestone. With that, I'll now turn the call over to Bob to discuss our financials and our outlook.

Thanks, Kim and good morning, everyone. Turning to our consolidated fourth quarter performance on Slide 5. We delivered revenue of $838 million, an increase of 10% overall compared to the prior year due to the FPM acquisition, favorable pricing, and strengthened EPS aftermarket parts and services, which was partially offset by lower volume for mid-sized capital equipment across a variety of end markets. Organically, revenue was down 1%. Adjusted EBITDA of $144 million decreased 2%, or 13% organically due to cost inflation and lower volume, partially offset by pricing and cost actions, including savings from the MTS restructuring program. We reported GAAP net income of $12 million, down from $17 million in the prior year, primarily due to an increase in business integration costs and higher tax expense related to corporate restructuring actions, partially offset by a gain in the quarter, related to the previously announced sale lease back transaction. Adjusted net income of $71 million resulted in earnings per share of $1.1, which was slightly above our expectations come near the quarter, but down 11% compared to the prior year, as cost inflation or organic volume, and an increase in interest expense, more than offset the incremental contribution of the FPM acquisition, pricing, and cost actions. Our adjusted effective tax rate in the quarter was 27.4%. We generated cash flow from operations of $167 million in the quarter, an increase of $93 million over the prior year, primarily due to trade working capital benefits, and cash received related to the settlement of our U.S. pension plans. Capital expenditures were $13 million in the quarter. Now moving to segment performance, starting with APS on Slide 6. APS revenue for the quarter of $591 million increased 15% compared to the prior year, primarily driven by the FPM acquisition. Organic revenue decreased 2% year-over-year as favorable pricing and record aftermarket revenue was more than offset by lower capital equipment volume. Adjusted EBITDA of $117 million was essentially flat year-over-year, but down 14% organically as cost inflation and lower volume more than offset pricing and synergies. Adjusted EBITDA margin of 19.8% was down 300 basis points over the prior year, but at the high end of our expectations for the quarter. As Kim mentioned, orders improved sequentially but remained soft overall as we anticipated. Backlog of $1.7 billion decreased 10% compared to the prior year and 3% sequentially. Order pipelines remain healthy across most of our key end markets and regions, but as we discussed previously, costs -- decision timing continues to be uncertain in this macro environment. Now turning to MTS on Slide 7, Q4 revenue of $247 million was essentially flat to the prior year and ahead of our expectations due to better than expected execution of backlog and higher orders. Adjusted EBITDA of $42 million decreased 8%, larger driven by cost inflation and unfavorable product mix, partially offset by the restructuring benefit and other cost actions. Adjusted EBITDA margin of 17% decreased 150 basis points compared to the prior year, but was generally in line with expectations. Backlog of $241 million decreased 1% compared to the prior year and 3% sequentially. Orders were up 10% year-over-year and 5% sequentially, primarily driven by injection molding equipment while hot-runner demand remained muted. Although this quarter's orders slightly exceeded our expectations, external market indicators such as machine utilization and mold making activity remain relatively soft and we have yet to see signs of a sustained recovery in demand. The team remains focused on driving productivity and managing discretionary costs to ensure we are well positioned to return to profitable growth once the demand environment improves. Now, I'll briefly cover full year results on Slide 8. Consolidated revenue of $3.18 billion increased 30% over the prior year, but decreased 5% organically as favorable pricing, record aftermarket revenue, and an increase in revenue for large polyolefin systems were offset by the persistent order delays for mid-sized capital equipment. Adjusted EBITDA of $512 million increased 6% but was down 12% organically compared to the prior year as lower volume and cost inflation more than offset pricing, restructuring benefits, synergies, and productivity. We reported GAAP net loss of $230 million down from net income of $107 million in the prior year largely driven by the non-cash impairment charge taken in Q3 related to our MTS segment. Adjusted net income of $234 million resulted in adjusted earnings per share of $3.32, a decrease of 6% compared to the prior year as lower organic volume, cost inflation, and an increase in interest expense more than offset the impact of the FPM acquisition, pricing, and cost actions. The adjusted effective tax rate for the year was 28.1%, which was consistent with our expectations. We generated full-year operating cash flow of $191 million down 16 million compared to the prior year as lower earnings and fewer customer advances on large projects were partially offset by reduced inventory. Capital expenditures for the year were $54 million and we returned approximately $63 million to shareholders through quarterly dividends. Turning to Slide 9. Net debt at the end of the fourth quarter was $1.69 billion, and net debt to adjusted EBITDA ratio was 3.3 times. Debt reduction continues to be our number one priority for capital allocation. We made good progress this quarter with solid cash flow and the execution of an opportunistic sale leaseback transaction. However, given the uncertain trajectory of orders over the coming year, our anticipated deleverage timing remains prolonged. Due to our typical seasonality of earnings and cash flow, along with lower starting backlog and the expectation that orders will remain relatively soft in Q1, we expect leverage to slightly increase in our fiscal first quarter, as this is normally a cash out fourth quarter due to the timing of certain annual cash payments. Now let me conclude my remarks with our 2025 outlook on Slide 10. Our guidance for fiscal 2025 reflects the potential for ongoing uncertainty in the macro environment and the impact to the timing of orders throughout the year. We anticipate total company revenues of approximately $2.93 billion to $3.09 billion, down 3% to 8% compared to the prior year. This decline is primarily driven by our APS segment, which we expect to be down 5% to 10%. We expect our MTS segment to be relatively steady with revenues expected to be down 2% to up 2%. We expect adjusted EBITDA to be in the range of $452 million to $488 million, down 5% to 12%, and adjusted earnings per share of $2.80 to $3.15. We're assuming interest expense of approximately $105 million and an adjusted effective tax rate of approximately 29% for the year. We are targeting approximately $200 million in operating cash flow for fiscal year 2025, reflecting lower earnings, payment timing related to the previously announced restructuring actions, and payments associated with synergy realization and accelerated productivity initiatives. We expect these impacts to be more than offset by our ongoing efforts to enhance trade working capital efficiency. We expect capital expenditures to be approximately $50 million for the year. Now I'll quickly provide some additional color for our segments. For APS, as I mentioned, we anticipate revenue of $2.05 billion to $2.175 billion, down 5% to 10%, driven by a decrease in capital equipment volume due to lower starting backlog, partially offset by modest growth in aftermarket. At the midpoint, we are assuming orders remain essentially flat to 2024, with modest sequential improvement starting in our fiscal second quarter based on expected customer decision timing as capital budgets reset in the new calendar year. We expect adjusted EBITDA margin to be 18% to 18.5%, which reflects better flow-through than our standard decremental margin due to ongoing focus on managing discretionary spend, accelerating productivity and cost synergy initiatives, and favorable mix of aftermarket revenue. For MTS, we anticipate revenue of $875 million to $915 million, down 2% to up 2%, with slight growth in our injection molding product line and relatively flat performance in our hot runner product line assumed at the midpoint. We are targeting adjusted EBITDA margin of 16.3% to 17%, reflecting approximately 70 basis points of margin expansion at the midpoint as we realize the carryover benefit of the restructuring actions taken in 2024 and continued focus on controlling costs and driving productivity, partially offset by ongoing price cost pressure and expected unfavorable product mix from a higher proportion of injection molding equipment. Due to ongoing macro uncertainty, we are providing Q1 guidance as well. We expect total revenues of $685 million to $705 million and adjusted earnings per share of $0.52 to $0.57, down year-over-year, primarily driven by decreased volume due to lower starting backlog. Please review Slide 10 for additional guidance assumptions. With that, I'll turn the call back over to Kim.

Thanks, Bob. Before we open the line for Q&A, I'll end our presentation with a few closing remarks. I'm incredibly proud of the team for delivering solid results to end our fiscal year. Although we haven't seen clear signals of meaningful demand recovery yet, we're confident in our strategy, the strength of our market position, and the underlying health of our end markets, which we fully anticipate will return to a solid growth trajectory once current macro uncertainties are resolved. I firmly believe our teams have the right tools and capabilities to manage the business through these near-term headwinds and come out stronger on the other side. We will continue to diligently manage costs, drive productivity and innovation, and execute our integration plans to position Hillenbrand for long-term success. With that, operator, please open the line for questions.

Thank you. [Operator Instructions]. And our first question comes from the line of Daniel Moore with CJS Securities. Please proceed with your questions.

Thanks Kim and Bob good morning. Thanks for taking the questions. You gave pretty good color, maybe just drill down a little bit. It sounds like orders starting to improve modestly in Q4. How do you see order rates trend -- order trends playing out into fiscal 2025 across end markets, any additional color relative to those comments you just gave? And then when might -- would you expect backlogs to start to level off and begin to grow again, is it maybe late 2025 or more likely in fiscal 2026 just based on what you see today?

Yeah Dan, I'll take that question here. So as we mentioned on the last call, 90 days or so ago, we clearly see capital budgets really being locked down for the rest of this calendar year. And obviously, we had back three months ago, we had a couple of unknowns. One, certainly the Presidential election, where that would land, but also interest rates and just broader macroeconomic topics, I would say. And so obviously we have the election behind us, so that's unknown. But we still have the interest rate environment and obviously, with Trump being elected, obviously, he's spoken about kind of what he's thinking. But it's still early days to determine exactly where things are going to land. But with that being said, just based on discussions with our customer base and obviously where we see interest rates ultimately going, we're not expecting a steep recovery here in Q1. But as capital budgets are unlocked here starting in our fiscal second quarter, I think we'll start seeing orders trickle in, in that second quarter and then continue to accelerate through the second half of the year.

Helpful. And maybe shifting just more specifically the hot runner. Demand seems like it continues to bounce along the bottom. Can you give any more granularity on what you're seeing kind of across industries as well as geographies from an end market perspective? And I've got a quick follow-up there. Thanks.

Yes. So Dan, it's Kim. What we've continued to see as this is the second quarter in a row that we've seen a good bit of stability and a little bit of growth in that hot runner market. Specifically, we've continued to see a strong quarter in India. And we've also seen good stability in China, although obviously, at lower levels than we had originally been experiencing there. Some of the activities that we've taken are really moving actively into a variety of end markets in order to expand our reach. And we -- through new product innovation, moved into some end markets that I think are going to create some opportunities for us, specifically in China and India with a couple of products that are going to hit that kind of top of the mid-tier, and those products are some areas that we're looking to expand. We're also continuing to monitor markets like medical end markets, which we believe will continue to show positive signs of growth in the coming 12 months, and will require some additional capital infusion in order to address some of those market opportunities.

Great. And maybe last for me, and I'll jump back in queue. It's only been a few quarters, but I'm just wondering if you're surprised whether the kind of degree and duration of the pullback in spending in food and pharma, I realize it's subject to the same macro challenges and budget constraints. But just curious if -- in terms of the confidence around the thesis that those markets will hold up generally better in a downturn for capital spending, and maybe your sense for kind of pent-up demand when the cycle does turn, would you expect to see a period of maybe outsized growth beyond the typical kind of mid to high single digits or is that just too early to call? Thanks again.

I think the pent up part of your question is a little bit too early to call. I think that the key driver there in those markets is consumer demand and discretionary income, and those are obviously affected by the factors that we brought forward, interest rates and inflation and those types of topics. And so those are some of the things that consumer demand is what companies are looking for in order to drive incremental investments in capacity and new products. And those are the things that we continue to watch. We've seen pretty stable markets I would say on the food side, remember, FPM is a combination of food businesses and also performance materials. I think we've seen good performance, relatively stable performance, even as people are pausing some of the investments on the food side of this equation. And that's really in line with what we expected to see in this market. We're also continuing to use this time to really focus our energies on getting the integrations done and really taking advantage of this opportunity to leverage the scale that we've created with these businesses, drive cost efficiencies, which you have seen, and then be able to attack those markets in a coordinated way as the timing of those orders becomes a little less dynamic as these market conditions continue to stabilize.

That’s really helpful. I will jump back with any follow-ups. Thank you.

Thanks Dan.

Our next question is from the line of Matt Summerville with D.A. Davidson. Please proceed with your questions.

Good morning Matt.

Good morning. So when I look at the APS deleveraging with organic down 2%, EBITDA down 14%, I think it was with the benefit of generating record aftermarket revenue. What are kind of the influencing factors that drove that deleverage and embedded in your guide is a material less impact from deleverage, so if you can kind of bridge that, that would be helpful? And then I have a follow-up.

Yes. So if you think about -- if your question is more on Q4, Matt, I think year-over-year, certainly our EBITDA percent was a little bit better than what we thought going into the quarter. But year-over-year, we did have an impact of volumes. We did have timing of incentive compensation that was a headwind for us in the quarter versus last year. And then we did have a mix of projects, lower margin projects that we executed this quarter versus last quarter. If I'm thinking forward to fiscal 2025 in our guide, order volume is going to be relatively flat. What we see is we just -- as I mentioned earlier on the call, we do see some modest improvements in aftermarket volume and pricing. But we're going to see some mix pressure, I'd say, within our Food, Health and Nutrition business as well. So with all that being said, I think we're going to continue to focus on cost containment actions and integration that Kim just highlighted.

Got it. And you mentioned in your prepared remarks that you're seeing -- continuing to see price pressure on the MTS side of the business. Can you maybe quantify that a little bit and then talk about what your thinking is in terms of incremental price capture to your last comment, Bob, for APS in fiscal 2025 relative to fiscal 2024? Thank you.

Sure. Yes, sure. So if I think about pricing in Q4, it's been relatively consistent from what we've seen all year. So APS continues to see price cost coverage well above 100%. MTS, we've been pressured all year and been below 100% and total Hillenbrand above 100%, which is great. MTS specifically, though, I'd say in Q4, we actually saw some improvements this quarter from what we've seen throughout the last couple of quarters, and so that's certainly something we're pleased to see. But as we think forward to fiscal 2025, at this point we're not assuming a continued steep recovery in pricing. So we're still assuming some muted pressure on that front going into 2025.

Got it, thank you.

Our next questions are from the line of Mitch Moore with KeyBanc Capital Markets. Please proceed with your questions.

Hey guys, good morning.

Good morning Mitch.

This quarter came in a bit higher than you had guided to. Just wondering if you could speak to what trended better for you in the quarter kind of relative to your expectations a couple of months ago?

Yes, I'd say so if I think about APS, certainly, higher revenue on the Food, Health and Nutrition as well as the plastic side. Aftermarket revenue was another record quarter for us and FPM specifically continues to outperform on the EBITDA side. So we bought that business a year ago at 13% margin. And as Kim has highlighted on some of the integrations that we've seen, we're well ahead of what our expectations are on that front. And so I think we'll consistently see that business operating at that mid-teens margins as we had here recently and going into 2025. And so we'll continue to see that business perform well. On the MTS side, revenues came in stronger on the injection molding business, and we saw that strength both in the Americas as well as India. On the hot runner business, I'd say still bouncing around the bottom of the cycle, although we did see some slight improvements in China, particularly in the automotive space. And so that business, when it does return, it does spike up. We are not assuming that now, but we're seeing some signs of some recovery there. So that's really what drove really the benefit in the quarter versus the guide that we gave.

Great. That's helpful. And then just on MTS, it seems like it's becoming stable kind of at a low level and potentially turning a corner here. Just with your initial guidance, how did you get comfortable with the flat sales guide for the year?

Yes, I mean -- so again, based on discussions with our customers, we've seen spikes in the last year where we have a good month and then the next month is a bit muted. And so as we sit here today, obviously, Trump, that's one box that got checked. But certainly, interest rates is still something that is a wait and see. And the customer base within MTS is a little bit more subject to the interest rate environment. So as we sit here today, we're seeing recovery in the injection molding side, that hot runner business, maybe a little bit less recovery. And so right now, it's kind of a wait and see until we see some orders really getting unlocked. And at this point in time, just being cautious. And the one thing I would highlight though is we did take some restructuring actions, as we've highlighted in the last couple of quarters. And so we do see margin improvement on the MTS side because we have completed all those restructuring actions, and so we will see that incremental $12 million of benefit coming through fiscal 2025. So as a reminder, we did have that charge of $25 million, $20 million of synergies coming from that. And so we'll see that here throughout 2025.

Great, thanks. I will hop back in queue.

[Operator Instructions]. The next question is from the line of John Franzreb with Sidoti & Company. Please proceed with your questions.

Good morning, thanks for taking the questions. Could you discuss a little bit about the changes in geography and demand in both India and China, it seems like there's inflection points going on in both regions?

Yes. I would say relative to India, we continue to see a lot of opportunity in India. I think you heard us comment on the fact that we saw a good quarter in our India injection molding business, a good level quarter in our hot runner business, and that continues to be an opportunity for growth as we think about projects on the APS side of the equation. As well as we anticipate further investments in India due to that growing global middle class, which, as you know, is an underpinning of why additional products and services are going to continue to grow in that region, and hence the need for our equipment. In terms of China, China has really been -- while we had experienced a significant downsizing of volume in that market over the last year and half, especially on the MTS side of our businesses and hot runners, that has leveled out and continues to kind of bounce around. It's not growing at historical growth -- excuse me, growth rates, but it continues to be stable and especially as we continue to invest, as I mentioned on Dan's question in that kind of upper mid-tier and some interesting end markets for us. I think we're going to be able to continue to look for opportunities to leverage our footprint there. We are very focused from a supply chain standpoint on a real local for local approach, both in India and in China and in the U.S., which allows us to, we believe, be able to compete over the long term. Even as some of these macroeconomic situations work out, we think we're best positioned with that footprint to be able to attack opportunities in each of those geographies.

Fair enough, thank you. And in the past you talked about test labs as being an indicator of future demand. Can you kind of update us on the test lab activity and is that still the case?

Yes. We have continued to see -- we do a lot of R&D with customers and typically, that test lab experience is what allows them to do proof of concept, and that's a precursor often, almost always, for their capital investments, specifically because those are collaborative experiments in those test labs, and those are a pay-to-play environment. So it's not just an environment where they come in and utilize test facilities, they are also paying for those trials. And so there -- it really cannot say a very serious investment on their side and on our side to investigate viability for those lines. The recycling labs are full, the polyolefin labs are full, the food labs are full. So we do feel very encouraged by that and as we have mentioned before, typically, we see those lab trials really slow down if we are entering a down cycle. And that has not occurred here nor have we seen down cycling of our parts and services business. In fact, those could have, as we've mentioned, continue to be very robust. And so those are both bell weathers for some of the optimism we feel as we look into the next year and some of the things that we continue to double down on as we look for some of these capital decisions to start working themselves through the pipeline as we enter the beginning of the calendar year.

That’s good to hear. Thanks a lot Kim. Thanks for the detail.

Great, thanks John.

Thank you. Our next question is a follow-up from the line of Daniel Moore with CJS Securities. Please proceed with your questions.

Thank you again. I apologize if you mentioned it, I may have missed it. How much of the $30 million synergies were realized as of September 30th and what's left in terms of incremental benefit for 2025 and beyond?

Yes. So our original guide going into the year, Dan, we thought we'd have about 7 to 9 of that achieved, and we're closer to like 2 times that amount here in the year. And I think we'll continue to see acceleration there on -- within 2025 and into 2026 as well.

And Dan, a reminder that those are cost synergies, and we feel very comfortable with the cost synergies, and you see that coming through in the margin. They performed very well on execution of the projects that they had in their pipeline. They've also been able to bring forward a lot of valuable benefit from shared services and from their operating model implementation and also now the co-branding and the simplification of that branding story into the marketplace, which was completed in September. That we also obviously see opportunities on aftermarket collaboration and the organization just went into place October 1st for combined aftermarket approach and also the operating model that they put in place to really create synergies among all the food companies and how we're approaching all of that. And that has organizationally created a number of synergies as well that started being implemented in June and then completed its implementation on October 1st. So we're really pleased with the way that is going and the cadence and the rigor with which we are managing that implementation and the folks that are doing that on our teams.

Got it. Really helpful. And I think I can answer this one, but the guidance in terms of cash EPS for 2025 doesn't assume any material change in tax rates, correct?

Correct. That's right.

And lastly, I appreciate the guide for operating cash flow as well as CAPEX. Is there a working capital headwind embedded in the $200 million OCF guide as demand -- and as demand for mid and large-sized systems recovers, how much of a tailwind could that be as we look out to 2026 and beyond, I'm just wondering how quickly we can get back to $250 million, maybe even $300 million in operating cash flow in an environment where demand does pick up? Thank you again.

Yes. So I'll give you some color on that, Dan. So if you think about the $200 million, maybe just talk about free cash flow net of the CAPEX. If you think about where we landed in fiscal 2024, we had $137 million of free cash flow coming in the door. If you think about what that looks like for fiscal 2025, we do have lower earnings. So obviously, that would be a headwind. We also had a onetime pension settlement that you saw in our remarks and in our press release as well. As previously discussed, we did offload our pension assets and liabilities to an insurance company this year, and so there's $27 million of cash left over from that. So that was shown as a onetime item in our cash flow statement here this quarter. So you have a couple of headwinds there. And then what we really see is upside with lower interest expense and then actually working capital improvement, particularly on inventory, AR and AP, we continue to focus on trade working capital as a percent of sales, the things that we can control. And certainly, some recovery in advances in that second half of the year. Now if order trends pick up a little bit quicker, obviously, we know what the cash advances, that could move that $150 million free cash flow number north. Really, that would come in, I guess, probably Q3, Q4 is what I would say there. The thing I want to highlight is if you're trying to bridge your free cash flow year-over-year, we did have that sale leaseback transaction that we announced in Q4. That was about $55 million of cash coming in. That's actually shown as investing cash flows. It is not in our $137 million. So it's additional cash that came in the door, we used to pay down debt. So that's kind of the bridge year-over-year. And then again, because of the lumpiness of orders, it's hard to predict when those advances come in, but that certainly would be upside in the second half of the year.

Robert I think, fair to say, Dan, look, the places where we've had the most pressure is on those -- in that midsized tier, mid to large. And when I say large, I don't mean like mega large. I mean I don't mean giant polyolefin. It's been that engineering plastics space. Those are POC projects, those do come with down payments. Those down payments are for both our engineering hours as well as buyouts. So those are the types of business that we're waiting to break on these orders is the type of business that is accompanied with down payments. The businesses that have been very steady and kind of steady pay as you go, the parts business, the individual equipment business, the smaller projects, those are the types of businesses that have been a little more steady in -- over the course of the last year. And it's those midsized with accompanying down payments that are -- that create some opportunity if those break more quickly.

Makes sense. And safe to assume that debt repayment remains a priority beyond dividends as it relates to that use of incremental cash generation at least near term?

Yes.

Perfect, thank you again.

Thank you. Our next question is a follow-up from the line of Matt Summerville with D.A. Davidson. Please proceed with your questions.

Just following up on the last point. In the context that your integration activities with FPM have been seemingly quite successful, maybe ahead of kind of the trajectory you had laid out when you bought the business, and knowing what I think at least, is your desire to get back into the M&A market sooner versus later to continue that acquisitive pivot towards more secularly attractive businesses. If that is indeed the case, how should we be thinking about this 3% dividend yield in context of me thinking about where you guys want to go and the idea that you probably want to get back in the market sooner versus later from an M&A standpoint, I guess, Kim, how are you thinking about all that?

Yes, Matt, that's obviously a topic as we discuss our capital allocation priorities. We continue to discuss that and evaluate that with our Board and obviously, in consideration of our investor base. And so we continue to look at that. As we look at our priorities, as we look at our portfolio, all of those things are a part of our normal processes with our Board. And so I can tell you that we are -- we have active considerations about exactly what we think is the best use of cash is for the benefit of shareholders, and we'll continue to do that. And if any changes are on the horizon, obviously, we'll share that if and when that is appropriate.

Thanks again.

Thank you. At this time, I'll turn the floor back to Kim Ryan for closing remarks.

Alright. Thanks again, everyone for joining us on the call today. We appreciate your ownership and interest in Hillenbrand, and look forward to talking to you again in February with our first quarter results. Have a great rest of your day.