Good morning, everyone, and welcome to Hillenbrand's Earnings Teleconference for the second quarter of fiscal 2020. A replay of this call will be available until midnight Eastern Time, May 21, 2020, by dialing one (800) 585-8367 toll-free in the United States and Canada or +1 416-621-4642 internationally and using the conference ID number 5866796.

This webcast will be archived on the company's website at ir.hillenbrand.com through Friday, June 5, 2020. If you ask a question during today's call, it will be included in any future use of this recording. Also, note that any recording, transcript or other transmission of the text or audio is not permitted without Hillenbrand's written consent.

At this time, it's my pleasure to turn the call over to Rich Dudley, Director of Investor Relations. Mr. Dudley, please go ahead..

Thank you, operator. Good morning, everyone, and welcome to Hillenbrand's Second Quarter Fiscal 2020 Conference Call. I'm joined today by our President and CEO, Joe Raver; as well as our Senior Vice President and CFO, Kristina Cerniglia.

Before we get started, I want to direct your attention to our supplemental slides posted on our IR website that will be used in today's call. Let me remind you 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.

I encourage you to take a look at slide three of the slide presentation and our 10-Q, which can be found on our website for a deeper discussion of forward-looking statements and the risk factors that could impact our actual results. We're going to approach this call a bit differently given the current business environment.

Joe will start with an overview of the actions we've taken in response to the COVID-19 pandemic and outline current priorities, followed by an update on the operating environment as it pertains to our business. It's our goal to provide investors with insights into what we are seeing in the marketplace.

Kristina will briefly review our fiscal second quarter results and more detail on the actions we've taken to mitigate the financial impact from the pandemic and provide an update on our balance sheet and liquidity and outlook. With that, I'll turn the call over to Joe..

Thank you, Rich, and thank you all for joining us this morning. Clearly, the challenges we're facing with COVID-19 are unprecedented in our lifetime. Our thoughts with those who have been directly affected by the virus, and we're grateful for the healthcare workers, first responders and the countless volunteers working to stop the spread.

Since the beginning of the outbreak, our priorities have been clear. First and foremost is to protect the health and well-being of our employees and their families. Second is to continue to meet the needs of our customers, many of which operate essential businesses and are directly linked to companies supplying the front lines, fighting the virus.

And third is to take actions to help our businesses not only navigate this challenging environment but to emerge even stronger.

As we manage through this challenging and very dynamic environment, our team remains committed to executing against three near-term initiatives we've discussed previously, which are; one, running our core businesses well and leveraging the Hillenbrand operating model to drive improved top and bottom line performance; two, integrating Milacron and achieving the full strategic and financial benefits of the combination; and three, generating cash to pay down debt.

We began planning and taking actions early in response to the COVID-19 crisis. As you may remember, on our last earnings call in early February, we were already working to ensure the safety of our employees, minimizing any impact to our customers and operations and mitigate the risk of significant disruptions to our global supply chain.

We also established a COVID-19 task force comprised of leaders from across the business and have implemented a governance structure with a frequent cadence of reviews at the operating company, enterprise and Board of Director levels. We've taken decisive actions to protect our employees and provide a safe working environment.

Most of our office staff are working from home. And for those who need to be on site, we've instituted enhanced safety protocols and new protections, including additional personal protective equipment, or PPE, employee health screening and major facilities, physical distancing and enhanced procedures for sanitizing workspaces.

We continue to monitor and update procedures in line with health policy and government recommendations. I'm proud of the extraordinary efforts of our team who have worked tirelessly to ensure the safety and well being of all of our employees. Over the years, we've built strong partnerships with our customers across all of our businesses.

Many of the products that we manufacture play a critical role in essential industries, including health and safety, food and agriculture, infrastructure and death care. We continue to work closely with our customers to support their needs through this pandemic.

To that end, we've expedited equipment to be used in the production of medical products, PPE and testing equipment in direct response to the critical needs of the healthcare workers and others serving on the front lines. We're taking steps to support operations and business continuity including closely managing our global supply chain.

Our significant production sites are currently open and are able to operate at or near capacity. As you'll recall, we were already working on supply chain excellence activities before the COVID-19 pandemic.

In the current environment, although we've moved production to various sites around the world to address the rapidly changing global conditions, we have not experienced any major disruptions to date.

We're in close contact with our suppliers to proactively manage and mitigate potential risk as we work to ensure that we can support our customers at the very highest level.

We believe we're in a very good position in terms of manufacturing operations and supply chain network, thanks to our team's efforts over the past year and early actions as the crisis has unfolded.

Finally, we've taken steps across the organization to proactively manage our cost structure and preserve our financial flexibility with a twofold goal of successfully managing through the crisis in the near term and positioning Hillenbrand to take advantage of new opportunities and to capitalize on increasing demand as economic conditions improve.

Kristina will cover our cost actions in more detail later in the call.

For more than a decade, we've been on a journey to transform Hillenbrand into a world-class global diversified industrial company with a focus on diversifying our portfolio and revenue streams beyond the original Batesville business, which has longer-term secular growth challenges.

We've executed on this vision through organic and inorganic means, including focused investment in R&D as well as acquisitions and dispositions. As we executed our strategy, our focus has been on growing recurring revenue and acquiring companies in niche markets with core technologies that have compelling cash flow characteristics.

Of course, underpinning all of our actions has been a relentless focus on continuous improvement, enabled by the Hillenbrand operating model. So now let me provide some more insights into the operating dynamic of our businesses.

At the outset of this section, let me also say that our senior leadership team is no stranger to navigating challenging economic conditions and recessions. We find ourselves in familiar territory again, and we're flexing that muscle. Let me drill down into our businesses a bit.

And given the current environment, I think it's useful to think of our businesses in three different buckets. The first bucket is equipment and systems, where we have long, medium and short-cycle businesses. This business were this part of our business was a little more than 50% of our total revenue in the last quarter.

The second bucket is aftermarket parts and service. This has been a focus of ours over the last few years and makes up about 1/4 of our total business. And the third bucket is the Batesville business, which is less sensitive to economic cycles. Batesville accounts for a little over 20% of revenues in the quarter.

Let me spend a little time on each, starting with equipment and systems. First is our long-cycle business of large polyolefin systems. As most of you know, this is the longest cycle business we have. Once we receive an order, it typically takes four to six quarters to deliver the final product or system.

We continue to receive orders in the second fiscal quarter, which contributed to a record backlog. And there's also a strong pipeline of projects that have not yet been awarded. These large systems have good working capital characteristics due to progress payments that are made as key execution milestones are achieved.

And because our systems are typically installed toward the end of a much larger project, we don't expect cancellations. Even in the 2008, 2009 period, this part of our business did not experience any large project cancellations or see significant delays. Over the past several years, we've experienced strong demand for these systems.

And as such, we worked hard to develop a more variable cost structure, not only to expand our capacity but also so that we can react more quickly to any potential downturns in demand. Given the long cycle nature of this part of our business, we are confident that we'll be able to plan effectively and manage our costs going forward.

We continue to closely monitor capital expenditure announcements made by our customers, the large petrochemical companies. But so far, reductions by these companies have been primarily in upstream investments, to which our systems are not exposed. All in all, we feel good about how this business is performing.

Next among equipment and systems are our mid-cycle capital products. In this category is the balance of the Process Equipment Group's equipment and systems, including compounding machines, feeders, separation equipment, crushers and pumps and valves.

Also included in our midcycle capital products are the Milacron injection molding and extrusion product lines. Once we receive an order for one of the products, it's typically delivered anywhere from one to three quarters in the future. So first, let's start with the process equipment.

These products serve a variety of end markets globally, including engineered plastics, recycling, food and pharmaceuticals, minerals and mining. Overall, demand was down in the first half of the year, driven by general industrial weakness, with particularly low demand for screening equipment for proppants as we had expected.

There have been a few bright spots, including strength in technical plastics in Asia and processed food globally. The injection molding and extrusion product lines within the Milacron segment are perhaps the most cyclical part of our business.

These products are mostly sold in North America and India, with a strong presence with custom molders, automotive, consumer durables and medical products. Orders have slowed significantly in North America and India, the two largest geographic markets for these products as both economies have been hit hard by COVID-19 and mandatory lockdowns.

We do have a manufacturing presence in India for these product lines, and we experienced some delays to customer deliveries at the end of the quarter. That said, our teams are working diligently to ensure supply chain continuity.

However, if we were to experience an extended shutdown in India, it could further negatively affect this part of our business. Notably, we saw a sequential increase in orders for the Milacron injection molding and extrusion product lines during the second quarter, but that momentum declined sharply in late March.

And as a reference point, peak-to-trough revenue was down about 40% in the 2009 downturn. However, I want to point out that the business serves a more diversified set of end markets today with less concentration in automotive. It also has a more efficient cost structure.

Furthermore, capital equipment sales were down in 2019 and the first half of 2020, and the U.S. automotive market was already soft pre COVID-19, so we believe that we are already well into the peak-to-trough cycle for this part of the business.

We've taken significant actions to reduce costs related to these product lines, which Kristina will cover in more detail later in the call. Finally, our short-cycle capital equipment includes hot runners, process control systems and mold bases that are part of the Milacron segment.

These products move quickly from order to delivery, typically in one to two months or less and are sold across the globe and into a variety of end markets, including consumer goods, electronics, automotive, medical and packaging. Demand for this equipment is driven by new product introductions and life cycles and volume.

These product lines were down in 2019 and declined further in the first half of 2020. Orders have been slow across all regions due to persistently weak automotive demand, which has been exacerbated by the pandemic. Many customers have put capital spending on hold, leading to the deferral of new projects.

Although not a perfect comparison, when looking at the 2008, 2009 downturn, revenues at that time declined about 15% and then snapped back quickly.

Like injection molding, these product lines were already facing softness in automotive and other end markets so we believe we are already on the way from peak to trough in orders for this part of the business. So that covers the first bucket being capital equipment and systems, and I'll now move to the other two buckets more quickly.

So the second bucket is our aftermarket parts and service business. The part this part of the business grew 4% organically year-over-year in the second quarter, and order rates remain stable. Importantly, the aftermarket business provides some of our best margins.

While this part of our business declines at the outset of a downturn, it tends to come back quickly as production activity rebounds. Finally, the third bucket is our Batesville business. Historically, this business has been less sensitive to economic cycles and has generated reliable and predictable cash flow.

Batesville experienced pockets of higher demand for burial caskets starting in late March. It's a trend that continued through April in certain metropolitan areas that have been harder hit by the virus.

Although we may continue to see increased mortality in certain geographic markets in the near term, we've also seen elevated cremation rates which serve as an offset to casket demand.

Looking beyond the near-term mortality associated with the pandemic, we expect burial demand will quickly return to normal and resume its long tailed, slow secular decline of about 1% to 3% per year, consistent with history and with little impact from the macroeconomic environment.

I hope that this additional color on the revenue dynamics of our businesses is helpful. With that, let me turn to the Milacron integration. We have a robust integration plan and our integration team, led by a dedicated integration management office is executing against that plan.

Despite the unexpected challenges associated with COVID-19, the integration is proceeding well, and all key work streams are on track to achieve our targeted synergies.

Following the close, we quickly executed a number of initiatives associated with reducing redundant public company costs, and we're moving forward with our functional integration work streams. We've made changes to the organizational structure to support value capture across the business.

These changes include centralizing many enterprisewide functions, including HR, finance, IT, legal and procurement. From a talent perspective, we've recently brought on a Chief Procurement Officer. This has been a welcome addition to the team and has made an immediate impact.

As I mentioned earlier, we are well positioned to realize our targeted year one cost synergies of $20 million to $25 million within the current fiscal year.

Additionally, we remain highly confident in our ability to achieve our target of $50 million of run rate cost synergies within three years and to drive incremental revenue synergies over the long term.

All of our integration activities are underpinned by the Hillenbrand operating model, which we believe will continue to drive long-term value well after the integration is complete.

Lastly, on the topic of integration, we're very pleased to be able to achieve one of our critical milestones, the sale of CIMCOOL at the end of March valued at approximately $224 million.

Before I pass the call over to Kristina, I want to underscore that while the COVID-19 pandemic has created near-term challenges, we remain committed to advancing our long-term strategy. So let me provide a brief update on our strategy.

The first of our four pillars in our long-term strategy is to strengthen and build platforms, both organically and through M&A with a focus in niche markets, specifically, plastics and chemicals, food and pharma and separation.

The acquisition of Milacron adds two solid platforms to the Hillenbrand portfolio and gives us strong complementary product and technology positions across the plastics value chain. We now have leading positions in base resin production, engineering plastics and plastics processing where plastics are shaped into end products.

In addition, we're well positioned and continue to have success in the small but growing recycling market.

We expect to leverage these strong positions to cross-sell product lines, expand our combined product offering in key markets and over the long run, to share technical know-how to win in new markets and applications such as biodegradable plastics.

We expect demand for plastics to continue to grow over the long run, particularly in industries that are increasingly recognizing the benefits of durable plastics, including medical products with an increased focus on safety, improved drug and therapy delivery and durability, consumer goods and construction where plastics improve durability and require less maintenance; and transportation, as lightweighting becomes more critical with demand for more fuel-efficient vehicles and electric vehicles.

Our second strategic pillar is to leverage Batesville for cash. Batesville has a long history of manufacturing excellence and has deep and long-standing customer relationships that make it a leader in the North American death care industry.

We run this business for cash, and it continues to provide the cash flow for us to diversify our revenue streams and offset long-term risk associated with the burial casket market. It has been historically less economically sensitive and has provided stable and predictable cash flow that is more important than ever in today's environment.

The third pillar of our strategy is to build a scalable foundation for growth using the Hillenbrand operating model.

With the acquisition of Milacron, we see the opportunity to build world-class center-led processes in areas such as finance, IT, human resources and procurement that leverage best practices and our increased scale to drive margin expansion and working capital improvements.

From an operational perspective, we are focused on continuing to improve manufacturing and supply chain productivity across the enterprise and are focused on expanding margins and reducing inventory, particularly in the newly acquired injection molding and extrusion product lines.

Our legacy Hillenbrand margin performance this quarter is a direct result of the operating model being consistently deployed throughout both Batesville and the Process Equipment Group. And we see significant opportunity to roll out the operating model throughout the Milacron segment.

Our fourth and final pillar is to effectively deploy strong free cash flow. We have been clear that we are reshaping our portfolio through organic and inorganic actions, and that it will take time to achieve our end state goal of becoming a world-class global diversified industrial company.

We believe strongly in the compelling long-term strategic merits of the Milacron transaction. We have a track record of maintaining a flexible balance sheet to grow through strategic acquisitions and a history of quickly paying down debt post close. We are employing that playbook and prioritizing debt pay down.

And while the COVID-19 pandemic is creating unforeseen challenges, we are confident in our ability to effectively generate free cash flow to do so. With that, I'll turn the call over to Kristina..

Thanks, Joe, and good morning, everyone. Thanks for being with us today. I hope everyone is safe and healthy during these extraordinary times.

We delivered solid operating results for the quarter in the face of significant uncertainty, highlighted by revenue growth in Batesville and one of the strongest quarters we've ever reported for order intake in the Process Equipment Group, which resulted in record backlog of nearly $1 billion in the segment.

We also drove year-over-year margin expansion in each of our legacy Hillenbrand segments. In addition, we completed our first full quarter with Milacron as part of Hillenbrand. And as Joe said, we completed the sale of the CIMCOOL business.

The proceeds from the divestiture meaningfully strengthened our financial position and provided additional flexibility. In the second quarter, we delivered total revenue of $649 million, an increase of 40%, primarily driven by the Milacron acquisition. Organically, revenue decreased 3% or 2% excluding FX.

The Batesville business in large plastics projects remained resilient in the face of challenging conditions, partly offsetting weaker results across our other industrial businesses. Adjusted EBITDA of $111 million increased 48%, primarily due to the Milacron acquisition, and adjusted EBITDA margin increased 90 basis points.

Organically, adjusted EBITDA increased 5% and adjusted EBITDA margin increased 140 basis points. We reported a GAAP net loss of $74 million or $0.99 per share, a decrease of $1.59 per share, primarily as a result of noncash impairment charges plus acquisition-related expenses.

Specific to the impairments, current economic conditions resulted in us performing assessment of the current values of the company's reporting units. As a result of our assessment, we recorded noncash impairment charges of $83 million, primarily related to our flow control businesses.

Adjusted net income of $40 million resulted in adjusted earnings per share of $0.53, a decrease of $0.10 or 16% mainly driven by incremental amortization and interest expense related to the Milacron acquisition.

The adjusted effective tax rate for the quarter was 28.1%, an increase of 220 basis points, largely due to unfavorable geographic mix of pre-tax income and an increase in the reserve for unremitted taxes.

Hillenbrand generated cash flow from operations of $28 million in the quarter, an increase of 150% compared to the prior year, primarily a result of improved working capital requirements, partially offset by increases in payments for interest and acquisition, disposition and integration costs.

Our legacy Hillenbrand businesses continue to perform exceptionally well in terms of working capital management. We delivered working capital churns of approximately 9 times in this part of the business in the second quarter.

We continue to look at all aspects of working capital including aggressively managing accounts receivable and optimizing inventory levels. We are working with our suppliers and our customers to negotiate better terms as we seek to strengthen our balance sheet and maximize cash flow.

With Milacron, we see clear opportunity to leverage the Hillenbrand operating model to drive more efficient management of working capital across the segment and improve our ability to generate cash. Capital expenditures were approximately $9 million in the quarter, and we returned $16 million to our shareholders in the form of cash dividends.

Moving to segment performance. I'll start with Batesville. Batesville revenue of $139 million increased 1% year-over-year. That was a good result as Batesville unit volume increased despite lower estimated demand for burial caskets.

We did not see a pronounced impact from the coronavirus in the second quarter results outside of a few specific metro areas where we started to see higher burial demand in late March. But as Joe said, that trend accelerated in April. By contrast, the estimated mortality rate associated with the flu was relatively low in the quarter.

Another positive for Batesville, adjusted EBITDA margin of 23.1% expanded 20 basis points in part as the team continued to leverage the Hillenbrand operating model to drive both productivity and volume initiatives. Process Equipment Group revenue of $311 million decreased 5% compared to the same period in the prior year.

Excluding the impact of foreign currency exchange, revenue decreased 3%. We continue to see strength in demand for large projects for base resin production, and the aftermarket parts and service revenue grew 4% in the quarter.

Offsetting this growth was the expected decline in sales of separation equipment for profits production, which accounted for a decrease of approximately 3%. We also experienced constrained demand for small to midsized capital equipment and some other industrial end markets and challenging macro conditions.

The Process Equipment Group did not experience a significant impact to second quarter results from COVID-19. Adjusted EBITDA margin of 18.5% increased 150 basis points, primarily due to pricing and productivity improvements and focused efforts on discretionary operating expense management.

We continue to leverage the Hillenbrand operating model to drive efficiency and reduce costs across the business. Our global procurement initiative was a significant contributor to this quarter's productivity improvements, and we expect this initiative to drive additional benefits going forward.

Unfavorable mix offset part of the margin expansion with the increased proportion of lower-margin large systems projects and the decline in demand for higher-margin separation equipment. Order backlog grew to a record $982 million at the end of the second quarter, up 2% year-over-year.

Excluding the impact of foreign currency exchange, backlog increased 4% and hit the $1 billion mark. Large polyolefin systems orders drove the majority of the backlog growth, and backlog increased in each of the Process Equipment group businesses with the exception of the separation business. Backlog was up 9% sequentially.

Milacron revenue of $199 million decreased 20% compared to the comparable period in the prior year before the acquisition. Entering the quarter, we were already experiencing soft demand for injection molding equipment and hot runner systems in certain end markets, including automotive.

This situation was exacerbated by COVID-19 with temporary shutdowns in China and India, affecting operations and placing further demand pressure globally.

We were able to mitigate the direct effects of the shutdown in China early in the quarter by tapping into the agility of our supply chain and shifting production of certain key product lines to sites in Canada and India. Later in March, when India shut down, we shifted the other direction as China was back up and running.

Given the timing of the shutdown in India, it did impact our ability to ship some orders on time. We estimate that the impact of shipping delays related to COVID-19 to be approximately $15 million of revenue in the quarter.

Adjusted EBITDA of $32 million decreased 32% and adjusted EBITDA margin of 16% decreased 290 basis points, as cost-out initiatives could not offset the fixed cost. Order backlog of $187 million decreased 17%, driven by a decrease in injection molding and extrusion equipment orders. However, backlog increased 28% sequentially.

The CIMCOOL business contributed $26 million in revenue and about $5 million of EBITDA in the quarter before the sale was completed on March 30. Regarding the integration, we are making good progress and generated $6 million in cost synergies in the quarter. Year-to-date, we have achieved $9 million in synergies.

And as Joe said, we remain on track to realize the $20 million to $25 million year one target within fiscal 2020. The main drivers of our year one savings are the reduction of public company costs through the integration of the corporate centers as well as indirect spend opportunities across the businesses.

Going forward, we see clear opportunity to drive operational efficiencies in manufacturing and improve working capital management across all the businesses. Now let me turn to the balance sheet. Net debt at the end of the quarter was $1.5 billion, and net debt to adjusted EBITDA ratio was 3.5 times.

The company has one near-term debt maturity in the amount of $150 million due July of 2020, which could be retired with cash on hand, borrowings under our revolving credit facility or by accessing public debt markets. We have taken on a defensive posture, given the uncertainty of the economy.

As of the quarter end, we have liquidity of approximately $534 million, including $374 million in cash on hand and $160 million of borrowing capacity immediately available under our revolver. And we were in full compliance with all covenants under the revolver. We remain focused on maintaining financial flexibility.

We have taken and will continue to take actions, so the company has ample liquidity to operate in the current business environment. As we think about capital deployment, we continue to prioritize deleveraging following the Milacron acquisition. As Joe said, we have a successful track record of paying down debt following acquisitions.

And we are confident we will do that again now. Our stated goal was to return leverage to below 2.7 times within 12 months of the transaction close. That time line has shifted and will depend on the duration of current macroeconomic uncertainty, but we remain committed to deleveraging.

We've previously announced the suspension of share repurchases and the curtailment of M&A activity while we prioritize deleveraging and focus on the integration.

Given the current global economic environment and continued uncertainty around COVID-19, we have taken decisive action to mitigate the financial and operational impact on the business while protecting our ability to continue to generate profitable growth over the long term.

Let me detail some of the actions we've taken to date to reduce near-term costs and support our free cash flow. We canceled merit-based salary increases for salaried U.S. and Canada based employees and Joe took a voluntary 30% reduction in the salary. The Board of Directors voluntarily waived its scheduled cash compensation increase for 2020.

We've reduced discretionary spending, such as travel and marketing expenses, suspended all hiring activity, except for our most critical open positions. We've pulled back on capital spending while prioritizing critical maintenance, safety and regulatory projects and high ROI growth investments.

And finally, we've implemented furloughs and reduced work arrangements in certain businesses that have experienced lower customer demand. In total, we expect these cost containment actions to result in near-term savings of approximately $25 million.

We're continuously reevaluating these actions and additional levers to manage our costs as the situation evolves. We've also made structural changes in targeted areas to optimize our footprint and right size certain parts of the business that we're already experiencing sustained slowness before the onset of COVID-19.

These changes primarily impacted the Milacron segment as we closed a small facility and reduced headcount in the quarter.

At the same time, we continue to make key investments in support of the future viability of the business by innovating in strategic growth areas such as technical plastics and recycling and by leveraging digital technology to advance our service delivery model. I'll now turn to our outlook.

We announced last month that we have temporarily suspended fiscal 2020 guidance as we cannot predict with certainty how long the disruptions from COVID-19 will last or how deep the economic impact will be. With that in mind, we wanted to provide additional color to help you understand how our business may perform over this quarter and beyond.

To that end, we have developed multiple scenarios modeled on assumptions around the depth of the economic adversity, the duration of the recession and the shape of a recovery. These scenarios range from a near-term recovery with minimal incremental disruption to more severe cases that include prolonged recessionary impacts well into next year.

Joe discussed the operating dynamics of our businesses, and I'll provide more detail on how we expect them to perform in a recessionary environment and provide an update on the trends we saw in April. In our long-cycle large polyolefin projects, our record backlog provides support for our business over the next 12 months.

We have high confidence in these projects moving forward. The pipeline of new opportunities also remain strong. While we could see timelines lengthen or order intake soften in more severe scenarios, we expect this business to provide a solid base of revenue and cash flow for at least to the next year.

The mid-cycle portion of the portfolio is more cyclical and we experienced increased softness across these businesses in the second quarter. In the case of a prolonged recession, this trend would likely continue. We also expect these businesses to rebound fairly quickly during a recovery based on their history.

The short-cycle capital equipment, including hot runner systems, moves in and out of cycles quickly. The business was already operating at a low level relative to recent history, and it's likely to remain low through a recessionary period. As the economy starts to improve, we believe this business will quickly return to growth.

Following past industry downturns, this business has experienced an accelerated recovery before returning to long-term average growth rates, showing resiliency and an ability to capture pent-up demand. We expect to see a similar response as product refreshments and new models begin to pick up steam in areas like electronics and consumer goods.

The aftermarket portion of our business provides a solid base of high-margin recurring revenue and historically, is not as sensitive to short-term demand fluctuations and provides a buffer when capital sales are down. Finally, we expect the Batesville business to be resilient even in a difficult economic environment.

In our experience, burial demand has remained stable in the face of economic downturns. Batesville has continued to provide an important source of stable, predictable cash flow, which is especially valuable in periods where our other businesses are facing cyclical pressure.

Let me provide some insight into the sales trends we saw through April in each part of the business, starting with the capital equipment and systems. In our long cycle, large polyolefin business, we continue to see normal customer behavior and projects have remained on track. The pipeline remains healthy.

The mid-cycle portion of the business is where we experienced the most pressure in April as orders continue to trend down. Customers failed back capital expenditures for compounding machines and material handling systems, especially in the U.S. and Europe.

Injection molding and extrusion orders slowed significantly in our two largest markets, North America and India, as both economies were hard hit by COVID-19 and mandatory lockdowns. Orders also continue to slow in our separation, crushing and flow control businesses.

Short-cycle capital equipment was a bright spot as orders started to rebound in late March as China returned to work following extended shutdowns. Order rates continued to increase in April, with improvement in Europe and as medical and pharma projects increased in response to COVID-19. Moving to aftermarket parts and service.

In April, we saw orders for spare parts slow, and our field service organization was constrained by travel restrictions globally, which limited their ability to go to customers' locations and complete service assignments.

If we see similar trends continue over the next two months, we would expect near-term decremental margins for our Process Equipment Group and Milacron segments to be approximately 40%. We are monitoring the situation closely.

And if the severity or duration of the recession worsens, we will deploy additional cost management levers to help offset a portion of the margin loss. Finally, Batesville experienced pockets of higher demand for burial caskets starting in late March. That trend accelerated in April, resulting in a strong year-over-year sales increase for the month.

Given the historical resilience of the business, we continue to expect Batesville adjusted EBITDA margins to be approximately 20% for the fiscal year. In summary, we believe that the diversity of our portfolio provides balance as we manage through a very challenging and uncertain period. We have stress tested our business against multiple scenarios.

And even in our most pessimistic case, we continue to forecast positive free cash flows. If a recessionary environment were to persist or deteriorate further, there are additional levers we can pull to protect the long-term viability of our business. Before I turn the call back to Joe, I want to discuss the financial reporting change we are making.

Beginning in the fiscal third quarter of 2020, we are updating our definition of adjusted earnings per share to exclude the impact of acquisition-related intangible amortization. As we consider the effect of the Milacron acquisition, we believe this approach will better reflect the company's true performance.

To put this change in perspective, if we were to apply it to our second quarter results, adjusted earnings per share would be $0.7 versus the reported $0.53, excluding $18 million of intangible amortization in addition to the backlog amortization already excluded.

Now to summarize, we are focused on maximizing our financial strength and flexibility during these uncertain times without sacrificing our ability to capitalize on economic recovery and advance our long-term profitable growth strategy.

We believe the actions we have taken to maintain financial flexibility and reduce costs, make us well positioned to navigate the challenges ahead. And now I'll turn the call back over to Joe..

Thanks, Kristina. As we manage through the challenges of COVID-19, I want to emphasize that our long-term profitable growth strategy remains intact.

We're leveraging the Hillenbrand operating model to manage the business in a challenging demand environment, and we're being mindful of both the short and long-term implications of the actions we're taking in our business.

Our team remains committed to running our core businesses well, integrating Milacron with excellence and driving synergies and generating strong cash flow to pay down debt.

We've taken decisive actions, both to weather the challenges brought on by COVID-19 and to position Hillenbrand to emerge from the crisis in a position of strength when market conditions improve.

Finally, I'd like to take this opportunity to recognize and thank the entire global Hillenbrand team for their focus on protecting our people while serving our customers. I believe their outstanding commitment to our objectives will help us emerge from the crisis stronger than ever and create meaningful value for all Hillenbrand stakeholders.

With that, we'll open up the line for your questions..

Thank you. [Operator Instructions] Your first question comes from Daniel Moore of CJS Securities. Your line is open..

Can you hear me?.

Dan, we didn't we were not able to hear you until just a second ago.

So could you please repeat the question?.

Great. Just looking at the outlook for fiscal Q3, you expected performance to be lower year-over-year. Just maybe define performance.

I assume that's both revenue and EBITDA overall and maybe remind us of what the pro forma numbers looked like for Q3 and Q4 last year with Milacron included and then excluding CIMCOOL, so we have sort of the right pace to think about?.

Sure. So as we talked about lower year-over-year, that's on a pro forma basis for both the revenue and EBITDA. To put it in perspective, 2019 revenue on a consolidated basis for third quarter was $688 million and EBITDA was $108 million..

Perfect.

And do you have those numbers for Q4 just as we think about the rest of the year as well?.

Sure. Q4 would be $706 million for revenue and $120 million for EBITDA..

Excellent. In terms of I'll jump around a little bit, forgive me, I've covered a lot of ground. But in terms of the balance sheet, down to 3.5 times leverage, obviously, EBITDA will be a little bit lower at least for the next quarter, if based on your current view of the world.

Maybe talk about the positive potential for positive free cash flow to offset that. In other words, do you see ending finishing fiscal year roughly where you are, a little bit higher leverage, a little lower? Your best guess in terms of tea leaves would be helpful there..

Yes. So obviously, these are challenging times, so very difficult to estimate where we will end up. I think as we look at let's just say, let's take this quarter, we were able to generate solid operating cash flow.

When you think about our business, typically, we generate more cash flow on the back half of our business than we do the front half of our business. Now with that being said, I would expect that to happen again this year but probably not to the extent that we were originally forecasting going out for guidance.

So again, positive free cash flow, while EBITDA will be lower, I think you heard we have really good performance on working capital on our legacy Hillenbrand business. We will continue to remain very focused on working capital, managing our working capital as well not just in the legacy Hillenbrand business but also Milacron businesses as well..

Helpful. I'm going to stay on the balance sheet for one more. Any additional levers to pull in terms of delevering? And you mentioned one option in terms of satisfying that near-term debt payment being tapping the public debt markets.

Do you see the public debt markets as being open and receptive currently at levels that would be acceptable to you?.

Yes. So markets are volatile, as you know. And so they started opening up last week. I would hope that they continue to remain open. But yes, we would look at that as an option as we go forward.

I think some other areas, I think we mentioned in the script, but I'll just I'll highlight again, as we continue to look at levers, we've obviously reduced our CapEx, and we'll continue to monitor that very closely. We do have some properties that are vacant, and we are looking to sell those. So there's another couple of levers.

Not significant, but we have a pool of actions to take..

Perfect. And last for me. Very helpful in terms of the color you gave kind of peak to trough for the two pieces of Milacron's remaining business, the hot runners and injection molding.

Maybe in terms of coming out of recessions, remind us what type of whether it be year one or sort of initial acceleration in growth those businesses have seen in the past and how this may be the same or different?.

Yes. Thanks, Dan. In terms of coming out of downturns, I would say, starting with the more short-cycle businesses, hot runner systems and control systems used in hot runners and mold parts. That comes back pretty quickly. And so we've looked back historically at the last decade or more.

And you can see when the business goes into a downturn, it comes out pretty quickly. Again, those are pretty short-cycle products. In some cases, we're delivering in a couple of weeks, but typically, one to two months in terms of delivery. So you can see those come back pretty quickly.

Just as a side note related to that, we did see China dip at the beginning of the quarter, as you know. And then it came back strongly at the end of the quarter in March. So you can see it happen pretty fast. So that's the short-cycle business. I would say the injection molding and extrusion business, that's a longer cycle.

And so that's a kind of a six, nine months to come out of a downturn in that business. And so I think that's how you can think about the injection molding and extrusion business and how it comes out.

Clearly, in the injection molding and extrusion business, there's an element of parts and service, and that behaves more like the overall parts and service business, where it comes in and out a lot faster in the downturn..

Helpful. I'll jump back with any follow-ups. Thank you..

Thanks, Dan..

Your next question comes from Matt Summerville of D.A. Davidson. Your line is open..

Thank you. A couple of questions.

First, just on the decremental, that 40%, absent the cost actions you have taken, albeit more discretionary in nature, what would decrementals have looked like absent those? And then could you talk about what that next layer of cost cuts might look like and where ultimately, if backs against the wall per se, ultimately, where do you think you could hold decrementals if you were to go after that next layer?.

Yes. So as it relates to the decrementals before the kind of the discretionary items, I mean, I don't think that it has a significant impact on the decremental. Where we're going to get the significant impact on the decremental is taking out more of our fixed cost.

And so as an example, we this month in April, we just shut down one of our smaller locations in Atlanta. And actions like that would decrease the decremental. We would look to take more significant actions like those that I just mentioned.

Depending on the depth of the scenario, and ideally, we would be able to in probably the Milacron business, keep the decremental to about 35% with some things that we could trigger. And some of those things are more getting rid of that fixed cost, if you will..

And then just with respect to the April comments, is there a way that you can give maybe a little bit of quantification around maybe how revenue trended in those sort of buckets? Whether you want to talk about long, mid short-cycle piece or just the PEG versus Milacron versus Batesville just to give us more tools, if you will, to help model this out?.

Yes. So I'm happy to do that. So with Batesville, PAUSE I would say we said very strong year-over-year growth, high single-digit growth year-over-year that we saw in April. As we come down to, let's just say, the PEG business or the PEG segment, rather. I would say that April was probably similar to what we saw in for the quarter.

So down, I would say, single mid mid-single digits. And then, the Milacron segment really was down quite substantially in part because India. Our manufacturing location in India remained closed. And so typically, we would ship out of that location. We didn't really have much shipments coming out of that location.

So if I were to look at the total Milacron segment, it was probably down very similar to where we were, again, ending the quarter or so around that 20% down or so..

That's helpful. I'll go back in queue..

Yes. So I think, Matt, just one other thing. I would expect, obviously, as India because again, this is April. So as India opens up, we should be able to recover a little bit.

And then same thing on the process equipment side of the business, we are seeing slowness in aftermarket, primarily because some of our customer locations are closed, and we just can't service the customers. And so that was also what an indication of April, which might change, might not..

Got it. Thank you, Christine..

Our next question comes from John Franzreb of Sidoti. Your line is open..

Yeah, Just a quick question on the balance sheet first. What went behind the firstly, we're fortunate to sell simple when you did, but what went behind the decision not to put the cash from that sale-to-debt repayment? And also, I haven't heard you mention anything about the dividend.

Is that also on the table if you need the cash?.

Yes. So as it relates to the cash from the sale of CIMCOOL, it is something that we were really happy to get completed in the quarter. I would say that we took a defensive posture in the quarter early in the quarter, just really not knowing what was going on.

So essentially, what we did is we just took that cash, kept it on the balance sheet in case of the unknown. And so I think as we were thinking about what we were going to do, we wanted to make sure that we took that defensive posture and took the cash. There's really nothing more behind it.

I think there are a lot of companies that drew cash and took cash on their balance sheet. We did something similar, just not being familiar with what was going to happen in the future. As it relates to the dividend, I'll pass it over to Joe..

Yes. As it relates to the dividend, as Kristina mentioned earlier, we modeled a bunch of different scenarios and even in the worst scenario, expect to be cash positive. All those scenarios contain continuing to pay the dividend. So today, we expect to continue to pay the dividend. Clearly, it's a challenging environment. We can't see forward.

That's a lever that we would have. But currently, as we see the world today, it's not something that we would expect to do. But we'll continue to monitor it, and the Board will make that decision really quarter-by-quarter..

Okay. And one more question, if I can. You mentioned the flow control side of the business was weak. We had a write-down associated with some of those businesses.

Can you talk a little bit about some of those end markets? How those markets fared, in particular, in April versus March? You've kind of already touched on the auto side of what's going on there and what's going on in proppants and some of those two what you're seeing, what your customers are telling you?.

Yes. So I think, as Kristina mentioned, that impairment was triggered by really the current economic environment. And then we're very focused on building the larger platform businesses in the company, particularly now with conserving cash. And so we're being very thoughtful, allocating cash to the highest return projects that we can.

And so we expect that to be more in line with some of the larger businesses. From an end market perspective, we've seen weakness in the industrial markets that we serve both in Europe with the pump business and in the United States with the valve business.

I would say also some of the larger projects that we tend to do, some of those related to energy and mining, and they tend to be more global, international projects in emerging markets. We've seen some softness in those projects as well. So the municipal side of the business in the U.S. is doing OK. It tends to come into a down cycle later.

So we expect to see that a little bit later if the downturn continues. But again, those are good businesses with good margin profiles and good cash generation. But given the current environment and our strategic focus on the larger platforms, especially as we're conserving cash, that led to the analysis and the impairment..

Okay, thanks. Out of the back into queue..

Our next question comes from Daniel Moore of CJS Securities. Your line is open..

Thanks again. We've talked about this in recent quarters, but I think lost in all of this is the win rate in PEG and the backlog and the opportunity set has held up really well. So maybe just talk about your win rate in larger polyolefin systems.

What's has it where it is relative to a couple of years ago, what's driving that and how sustainable?.

Yes, Dan, I agree with you. We the team has done there, really, I think, a terrific job in terms of continuing to innovate, continuing to offer solutions and solving customer problems that we believe give us a competitive advantage. And so again, we continue to see strength. We continue to see our win rate grow.

It's these are long-term games, right? There are only a handful of these projects that are awarded every year. So really, it makes sense to look over a long run and how the business is doing. And I think I would say, over the last few years, we've won more than our fair share of these larger projects.

And again, a lot of it is due to innovations that the team has been developing over the last several years. They take a while to get to the marketplace given the length of these cycles. But we remain very positive about that business. And then also, the team has just been executing like crazy.

So it's one thing to win the business, it's another thing to be able to go execute the project, particularly when you're doing high volumes, flawlessly and maintaining margins and delivering a high-quality project to our customers. And they so they've not only been winning, but they've really been executing in that business.

And again, we feel good about that business today as well as going forward..

Very helpful. thank you again..

And there are no further questions. I will now return the call to our presenters..

Thank you, operator. Again, it's a challenging environment out there right now. I have to complement the team. I think we have a very strong team, the strongest team since I've been here at Hillenbrand.

They've done a great job executing in a challenging environment all the way from the Batesville business, getting the CIMCOOL divestment done in the quarter, improving margins on the process equipment side, the integration on track, even in a challenging environment, the integration on track. And the things that we can control.

Our focus is execution, execution, execution. And so we're confident in our ability to steer the company through this crisis and really come out on the other side of the crisis in a much stronger way, both process wise but also competitively positioned in a stronger manner. So with that, I just want to say thanks for joining us on the call today.

We look forward to talking to you again to discuss third quarter -- fiscal third quarter results in August. Thanks, everyone, and have a good day..

This concludes today conference call. You may now disconnect..