Good morning everyone and welcome to the Hillenbrand's second quarter of fiscal 2021 earnings conference call. A replay of this call will be available until midnight Eastern Time, Wednesday, May 9, 2021 by dialing 1-877-407-8012 toll free in the United States and Canada or +1-412-902-1013 internationally and using the conference ID number 13718627.

This webcast will be archived on the company's website at ir.hillenbrand.com through Friday June 4, 2021. If you ask a question during today's call, it will be included in 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 conference call over to Kaveh Bakhtiari, Senior Director of Investor Relations. Mr. Bakhtiari, please go ahead..

Thank you. Good morning everyone and welcome to Hillenbrand's second quarter fiscal 2021 conference call. I am joined by our President and CEO, Joe Raver and our Senior Vice President and CFO, Kristina Cerniglia. I want to direct your attention to the supplemental slides posted on our IR website that will be referenced on today's call.

Turning to slide three, a reminder that our comments may contain certain forward-looking statements that are subject to the Safe Harbor provisions of the securities laws. These statements are not guarantees of future performance and our actual results could differ materially.

Also, during the course of this call, we will be discussing certain non-GAAP operating performance measures including pro forma comparisons for our segments.

I encourage you to review slide three of the 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. With that, I will turn the call over to Joe..

Thank you Kaveh and good morning everyone. Thanks for joining us today and we hope that you and your families are safe and well. I would like to begin by thanking our employees around the world for their continued dedication during the pandemic.

Over the past year, our number one priority has been and continues to be the safety and wellbeing of our employees, their families, our customers and the communities in which we live and operate. As the vaccine has rolled out in the United States, we have seen infection rates, hospitalizations and deaths continue to fall in recent months.

However, in other parts of the world, especially in India, we have seen the number of serious infections spike significantly. We remain vigilant and committed to the health and safety of our employees and continue to follow recommended safety protocols in all of our operations around the world.

Virtually everyone's normal routines have been disrupted by the pandemic, both at work and at home and despite these many challenges, our employees have risen to the occasion and have gone above and beyond to serve our customers. We are very fortunate to have such a dedicated group of employees across the globe and for this I am grateful.

Before I get into the highlights of the quarter, let me spend a few minutes on the execution of our strategy as outlined on slide five. As we have consistently communicated, we are focused on executing four key strategic pillars as we work to build Hillenbrand into a world class global industrial company.

The first is to strengthen and build business platforms, both organically and through M&A. The Milacron acquisition represented a major step in the execution of this strategic pillar and we are pleased by the success of our integration and the continued rebound in demand for MTS products.

As a reminder, this acquisition added industry leading hot runner and injection molding product lines to the Hillenbrand portfolio. We remain confident in the long term growth prospects of this segment.

Given the strength of our balance sheet, we expect to accelerate growth investments, both organically and inorganically with a focus on strengthening and building our large product platforms in APS and MTS.

For example, our focus on growing the recycling business is gaining momentum and we now have solutions in chemical and solvent-based recycling in addition to our well established offerings in mechanical recycling. This is an exciting market that we expect to grow significantly across the globe over the coming years.

Our second strategic pillar is to manage Batesville for cash. Batesville has a long history of manufacturing excellence in burial caskets with solid and predictable cash flow that we can invest to grow our industrial platforms.

Batesville's outstanding cash flow over the past several quarters played a key role in reducing our debt and underscores the important role they took place in our portfolio. The third pillar of our strategy is to build a scalable foundation for growth using the Hillenbrand operating model.

The acquisition of Milacron has provided a unique opportunity for us to transform and scale many of our shared functional business processes in areas such as IT, HR and finance.

This effort to standardize processes and services and leverage best practices has helped us realize synergies and build a scalable foundation to grow our platforms more efficiently and effectively. We are also leveraging our combined spend through our global supply management team.

We continue to add strong experienced global talent in this area and are seeing the benefits as we work through this period of rising inflation and supply chain disruption. Our fourth and final pillar is to effectively deploy strong free cash flow.

We have a proven track record of quickly deleveraging following acquisitions, allowing us to maintain a flexible balance sheet so we can continue to invest through economic cycles.

We are confident in our ability to continue to generate robust free cash flow, maintain a strong balance sheet and grow our company while returning capital to our shareholders.

As we communicated last quarter, we lifted the temporary suspension of our share repurchase program and announced that we will resume consideration of strategic bolt-on acquisitions. Since then, our financial flexibility has been further enhanced through our strong cash generation and the long term financing actions we took in the quarter.

We are increasing organic investments in our businesses while continuing to evaluate inorganic opportunities to accelerate our growth. As always, we will remain disciplined in our approach to deploying cash. Now let me turn to the business.

We had a very strong second quarter in each of the segments with solid revenue, strong margins and significant cash flow. We ended the quarter with a record backlog of $1.5 billion, providing significant momentum in our industrial segments heading into the second half of our fiscal year. The integration of Milacron continues to go well.

And we are building our organizational capabilities by applying the Hillenbrand operating model across the enterprise. We continue to simplify and focus our portfolio. During the quarter, we completed the sale of ABEL and remain on track with our previously announced intention to divest TerraSource Global.

Our operating cash flow performance in the second quarter was exceptional and we reduced our net leverage ratio by over a half turn sequentially to finish at 1.7 times net debt to EBITDA.

We added key talent to our leadership team with the hiring of Leo Kulmaczewski as Senior Vice President for our Operations Center of Excellence and the Hillenbrand Operating Model. Leo is a proven senior executive with great operational experience at some very good companies including Thermo Fisher, Danaher and Belden.

I am also pleased to let you know that Tory Flynn has rejoined the company as our first Chief Sustainability Officer. Tory will report directly to me and I look forward to working with her to accelerate our progress in this area.

Later this summer, we plan to issue our second sustainability report to share the operational progress our businesses have made on our journey over the past year. We are driving accountability and transparency by building processes to capture and measure progress, engaging with our stakeholders and building on our disclosure practices.

We remain committed to working with internal and external stakeholders in the implementation of our sustainability strategy. Accelerating investment in ESG is critical to meeting our long term goals and the addition of a Chief Sustainability Officer adds to the overall strength of our management team.

Again, I look forward to working with Tory as we increase our efforts in this important area. So in summary, I am pleased with our execution this quarter and encouraged by the continued momentum in our industrial segments as evidenced by our third consecutive quarter of record backlog.

As we enter the second half of the year, our priorities remain focused on driving profitable growth in our large platforms, capturing the full benefits of the Milacron acquisition and strategically deploying cash to drive long term shareholder value.

With that, I will turn the call over to Kristina to provide more specific details on our overall financial performance, segment performance and outlook..

Thanks Joe and good morning everyone. Throughout my section, I will be referencing pro forma results which exclude Red Valve and ABEL in the APS segment and the Cimcool business in the MTS segment.

We believe these pro forma results provide a better comparison of our ongoing operations and you will find a comparison of as reported and pro forma results on slide 19 of the earnings slide deck. Turning to the quarter. Our teams built on their strong momentum with continued revenue growth, strong margin performance and exceptional free cash flow.

We are pleased with the results, particularly given rising inflation and continued uncertainties caused by the pandemic. Total company backlog increased over 30% year-over-year on a pro forma basis to a new record of $1.5 billion, a sign of continued strong demand for our highly engineered solutions and products in both APS and MTS.

We delivered total revenue of $722 million, an increase of 11%. Excluding the impact of foreign exchange, total revenue increased 8%. On a pro forma basis, revenue increased 18% driven by strong growth within the MTS and Batesville segments. Adjusted EBITDA of $134 million increased 21% and adjusted EBITDA margin of 18.6% increased 160 basis points.

On a pro forma basis, adjusted EBITDA of $133 million increased to 29% driven by volume and productivity including synergies. We reported GAAP net income of $78 million or $1.03 per share compared to a loss of $0.99 in the prior year, due to a gain on the sale of ABEL and prior year impairment and inventory step-up charges.

Adjusted net income of $75 million resulted in adjusted earnings per share of $0.98, an increase of $0.28 or 40%, driven by strong growth in MTS and Batesville. The adjusted effective tax rate for the quarter was 27.1%, a decrease of 100 basis points from the prior year, due to a change in the geographic mix of income year-over-year.

Hillenbrand generated cash flow from operations of $193 million, an increase of $165 million compared to the prior year. This increase was primarily driven by higher earnings and favorable timing of working capital requirements, particularly strong customer advances in both APS and MTS segments.

Capital expenditures were approximately $6 million in the quarter, lower than anticipated due to project timing. We expect to return to a more normal spend trajectory in the second half of the year. We paid down $182 million of debt and returned $16 million to our shareholders in the form of cash dividend.

We recognized $8 million of incremental synergies in the quarter and we expect to deliver $20 million to $25 million of synergies this year. We remain on track to achieve the three-year $75 million total run rate synergies related to the Milacron acquisition. Moving to segment performance.

Batesville had continued strong performance in the second quarter with revenue of $166 million, increasing 20% year-over-year. The estimated increase in deaths due to the COVID-19 pandemic were partially offset by an estimated increase in the rate at which families opted for cremation.

The circumstances driving the increase in burial casket demand are unfortunate and unprecedented. We do expect that to decline in the second half of the fiscal year, both sequentially and on a year-over-year basis. Operating leverage and productivity initiatives contributed to strong margin expansion, though slightly behind expectations.

Adjusted EBITDA margin of 26.9% improved 380 basis points over the prior year despite higher than expected increases in commodity inflation and transportation and manufacturing costs required to respond to the surge in demand driven by the COVID-19 pandemic in the quarter. Turning to molding technology solutions.

We saw continued strength as both revenue and margins exceeded our expectations. Revenue of $255 million increased 28% and 47% on a pro forma basis in comparison to the prior year. Excluding the impact of foreign exchange, revenue increased 45%.

Sales of junction molding capital equipment more than doubled on strong demand in custom molders, consumer goods, medical and packaging. Importantly, aftermarket parts and service sales improved and were higher on a year-over-year and sequential basis.

India continued to rebound strongly in the quarter as well with both injection molding and hot runner sales up across all end markets. We continue to monitor the COVID-19 situation in India closely. As local governments announced new virus related shutdowns, we anticipate these disruptions will have an impact on our fiscal third quarter.

Adjusted EBITDA of $51 million increased 59% and 89% on a pro forma basis with adjusted EBITDA margin of 20% increasing 440 basis points compared to the prior year on a pro forma basis. The improvement was driven by higher volume and productivity initiatives including cost synergies.

We are encouraged with these results and remain focused on leveraging the Hillenbrand operating model to drive sustainable operational improvements. Record order backlog of $362 million increased 93% compared to the prior year and 24% sequentially, driven by an increase in injection molding equipment orders.

Activity was strongest in the custom molder, automotive and construction end market. Turning to advanced process solution. APS revenue of $301 million decreased 3%. On a pro forma basis, revenue of $295 million was flat to prior year. Excluding the impact of currency, revenue decreased 5% on a pro forma basis.

The sales decline was primarily driven by the expected decrease in large polyolefin systems due to customer driven delays on certain projects and lower parts and services sales.

Recently however, we have started to see signs of a pick up in service and aftermarket parts orders which we expect will translate to sequential revenue growth in the second half. Longer term, we continue to see opportunity for growth in this area as the installed base of our large systems continues to grow.

Adjusted EBITDA margin of 18.5% was flat compared to prior year on a pro forma basis and higher than expected coming into the quarter. The headwind from lower volume and inflation was largely offset by pricing, cost containment actions and productivity improvements.

Order backlog reached a new record high of $1.2 billion at the end of the second quarter, an increase of 22% year-over-year. We continue to see solid demand in the pipeline for new large plastics project during the quarter, primarily from Asia. These projects are expected to contribute to revenue over the next several quarters.

We have not received any cancellations from our large project customers nor do we expect to. Turning to the balance sheet. Net debt at the end of the quarter was $867 million and the net debt to adjusted EBITDA ratio fell by over half a turn sequentially to 1.7 times.

As of quarter end, we have liquidity of approximately $1.2 billion, including $345 million in cash on hand and the remainder available under our revolver. As of March 31, we had no bearing on our revolver.

In February, we issued $350 million in a 10-year senior unsecured note at 3.75% in order to secure a long term financing at attractive rates for general corporate purposes, including to repay debt and replenish available cash after debt repayment. In the quarter, cash proceeds from the sale of ABEL were $106 million.

We paid down $182 million in debt including prepayment of our $500 million term loan due in 2024 with cash on hand and revolver borrowing. We have no near term debt maturities and we will continue to leverage the Hillenbrand operating model to drive efficiency across the business.

Our efforts will remain focused on improving working capital efficiencies, particularly in the MTS segment. Turning to capital deployment. We are pleased with our aggressive deleveraging progress which has given us greater flexibility to invest in both organic and inorganic growth.

We are now comfortably within our leverage guardrails and will prioritize reinvesting in the business in evaluating strategic investments in high return opportunities. Let me conclude my prepared remarks with our near term outlook.

Similar to the review of quarterly results, I will be referencing pro forma results in this section which exclude Red Valve and ABEL in the APS segment and Cimcool business in the MTS segment. We are providing guidance for the third quarter of fiscal 2021, given the continued uncertainty due to the global pandemic.

Even though disruption from the pandemic has lessened in the U.S., we continue to be adverse impact from the resurgence of COVID in our international locations, primarily India. We expect Hillenbrand's total third quarter revenue to increase year-over-year in a range of 13% to 17%.

We expect adjusted EBITDA in the range of $110 million to $120 million and adjusted earnings per share in the range of $0.70 to $0.80 for the third quarter.

As we enter the third quarter, we anticipate earnings pressure from lower Batesville volume which carries a higher margin, inflation, a return of sales, marketing and T&E spend which was curtailed during the second half of last fiscal year and additional investments to fuel profitable growth.

Starting with Batesville, in the third quarter we expect revenue to decrease 7% to 11% year-over-year as we expect a significant drop in burial demand due to a reduction in COVID-related deaths in North America. We expect this trend to continue for the rest of the year due to the high level of COVID-related deaths last year.

We expect adjusted EBITDA margin of 18.5% to 19.5% as we anticipate productivity initiatives to partially offset the adverse impact of lower volume and rising inflation.

In advance process solutions, we expect third quarter revenue to grow year-over-year in the range of 18% to 23%, primarily due to strength in revenue from large plastics projects as well as aftermarket parts and service revenue.

Though delays still persist with some of our large polyolefin projects in the backlog, we see strength in other end markets like engineering plastics, food and recycling. Furthermore, we see a reduction in COVID-related delays that impacted our aftermarket business also contributing to a year-over-year revenue growth.

We expect adjusted EBITDA margin of 18.8% to 19.2% to be lower from a year-over-year perspective, down 130 to 170 basis points as the headwind from inflation, project mix and a return to more normal spending patterns that were curtailed in the third quarter last year is partially offset by price and productivity initiatives.

Turning to molding technology solutions. We expect strong third quarter revenue growth in a range of 23% to 28% over prior year as demand continues to be strong in both hot runner and injection molding product lines.

Though we have accounted for some disruption due to the resurgence of COVID in our international locations, primarily India, any significant and prolonged shutdown will have a negative impact to our results.

We expect adjusted EBITDA margin of 19.5% to 20%, down 50 to 100 basis points year-over-year as the benefit of higher volume and continued productivity improvements is expected to be offset by higher injection molding sales which carries lower margins than hot runner system, inflation and a return to more normal spending patterns with respect to investment.

Given the uncertainty that remains due to the pandemic, we will only provide an outlook for our industrial segments for the fourth quarter and full year. In the advanced process solutions segment, we are expecting revenue in the fourth quarter to be up high single digits year-over-year resulting in mid single digit growth for the full year.

This is an improvement to the outlook we gave last quarter, driven primarily by strength of our large plastics project and growth in the aftermarket business.

We also expect adjusted EBITDA margins in the fourth quarter and the full year to be slightly down year-over-year due to inflation, growth investments and unfavorable project mix, partially offset by pricing and productivity.

In molding technology segment, we expect fourth quarter year-over-year revenue growth in the mid teens and full year growth in the high teens which is an improvement to the outlook that we provided last quarter driven by our strong backlog and continued order momentum in multiple end markets.

We expect a year-over-year decline in our adjusted EBITDA margin in the fourth quarter due to a return of normal spending patterns, a higher proportion of injection molding equipment which come at a lower margin compared to our hot runner system and an increase in growth investments.

For the full year, we anticipate moderate adjusted EBITDA margin improvement as additional volume leverage and productivity including cost synergies are partially offset by higher injection molding sales, inflation and additional growth investments.

As a reminder, our outlook for the year is contingent upon no prolonged shutdowns in any of our key markets due to the resurgence of COVID. Our team has demonstrated the ability to execute through challenging circumstances. And I am confident that we can continue the momentum in the back half of the year. And now I will turn the call back over to Joe..

Thanks Kristina. Let me leave you with a few final takeaways before we take your questions. We ended the quarter with record backlog positioning us well to drive growth in our large platform businesses in the second half of the year and beyond.

Additionally, the Milacron integration is proceeding well and we remain on track to achieve our three-year run rate synergies of $75 million. The work we are doing in procurement and operations is improving the resiliency of our global supply chain and helping to protect our margins in an inflationary environment.

We further simplified our portfolio by completing the divestiture of ABEL in the quarter and we are on track in the process to divest TerraSource Global. And finally, we significantly strengthened our balance sheet over the past 12 months and are now focused on investing in growth initiatives.

We believe we remain well positioned to overcome any near term macro challenges and are confident in our strategy to drive profitable growth over the long term.

Before we open the line for Q&A, I do want to take a moment to acknowledge and extend my sincere thanks to our former Board member, Tom Johnson, who retired this week after 13 years of outstanding service on our Board.

I enjoyed working with Tom over these many years and believe our company benefited significantly from his experience, dedication and perspective. On behalf of everyone at Hillenbrand, I would like to wish Tom all the best in this next chapter. With that, we will open the line for your questions..

[Operator Instructions]. Our first question today is from Matt Summerville of D. A. Davidson. Please proceed with your question..

Thanks. Good morning.

Can you talk about what you expect the full year unabsorbed cost pressure to be for Batesville in fiscal 2021 particularly, as it relates to inflationary pressure with steel transportation costs, over time cost, et cetera?.

So Good morning Matt. Yes, as it relates to Batesville, so in the back half of the year, we do expect inflation of roughly $13 million to $15 million and we expect pricing to cover probably about a third to a half of that. And so therefore we will be exposed to that incremental inflation.

Now, with that being said, our annual price increase goes into effect in October in which we will be recovering price at that point in time..

Got it. Thank you Kristina.

And then as we go forward, can you talk about the plastics funnel and backlog with respect to the traction you are getting with recycling and eco-friendly materials? Is that becoming a more material portion of your overall business? And what the go forward growth rates look like there?.

Hi Matt. It's Joe. Yes. So I think there's two different parts there. There's no question that if you look back into the quote pipeline, both for recycling materials and then plastics made out of bio materials, the quote pipeline is very strong and it's continues to grow and has grown over the last quarters, but that growth is accelerating.

And so are our core pipeline is good. We continue to close jobs there and that part of the business, while small, continues to grow, particularly on the Coperion side.

As I mentioned in the prepared remarks, most people when they think about recycling they think about mechanical recycling where products are shred and cleaned and then run through the process to make pellets, recycled pellets.

There's also chemical and solvent-based recycling which really reduces the plastic back to really very close to its original state as a hydrocarbon. And so we are now well positioned in all those parts of the recycling business. And growth right now continues to be in Europe where there's a longer history of recycling mandated in local municipalities.

But we are seeing that demand for that grow around the world and we would expect that to continue to grow, not just for a couple of years but for quite a long time. And then in terms of bioresins, plastics that are different types of resins, we are seeing that across all of the plastics businesses.

So the hot runner side, they continue to build their database in terms of how the plastic behaves when it's heated and injected. And then also in our injection molding machine, really very similar kind of database being built. So we are very active on really all the plastics product lines around bioresins and recycling.

So hope that answers your question..

Yes. Thank you guys. I will get back in queue..

Thanks Matt..

The next question is from Daniel Moore of CJS Securities. Please proceed with your question..

Thank you and good morning. That's interesting, I actually wanted to touch on that topic as well.

So maybe you can elaborate a little bit on the competitive positioning in landscape and some of the more in the emerging recycling areas and eco-friendly areas relative to your kind of legacy positioning? And where do you see this as a percentage of revenue in APS and MTS, say, three to five years from now?.

Yes. So Dan, great question. So one of the things to keep in mind about our solutions, particularly on the APS side as it relates to recycling, we are a continuous process. So our extruders are a continuous process as opposed to batch process. And so all the things that we do that move to continuous process are important.

And so as scale gets bigger and we also tend to do larger system, so as scale gets bigger like we have seen in mechanical recycling, we are really well positioned and feel like the market is moving towards us, both on the post-consumer side but also on the industrial side. And then it's the same with the other types of recycling.

As the scale of those things increase, those applications increase and the technical specifications continue to increase, as consumer's demand more, for example, post-consumer waste in the final product, making sure that those final pellets and the final product is of high quality.

It gets sort of more and more technically demanding as that percentage of post-consumer or post-recycled materials increases. So we feel like that the market is moving towards us and our capabilities in this area. I would say, if you think about our polyolefin systems as an example, we are providing large systems in many cases.

We are not really a large systems provider in recycling. We do have a number of the key components.

But as we continue to grow, we get better and better at understanding how the systems work, how to make the entire system not just our immediate extruder, for example, more productive and effective but also how the entire system works, how the applications work.

So we continue to be really at the very front end of what's happening in recycling and are really well positioned to do a good job in that market and win over the long run.

Now, it's a very small part of our business today, especially when you think about revenue but when you look at a quote pipeline, it's growing pretty quickly, particularly in our mid sized projects. And so it's hard to predict how this part of our business is going to unfold.

But I will tell you, there is a strong push around the globe for increased capture of plastic materials and the circular economy concept. And so as that continues to grow, it will be driven, I mean quite honestly today, resin base, virgin resins are pretty inexpensive. And so they continue to be a very big part of the market.

But as more legislative mandates and local mandates come out for increased recycled materials and the capture of the recycling, the capture of it continues to improve around the world, we will continue to see this market grow pretty significantly, we believe. And again, it's not just the quarters or years.

This is a long term market that we expect will be significant for us in the coming years and we are putting a lot of attention on this market as we think it could be very large in the long term..

Very helpful. I appreciate it.

Maybe just talk a little bit about, if we look beyond the guide in fiscal 2021 and into next year in MTS in particular with injection molding accelerating, how do we think about the incremental margins in that business? You have got the remaining synergies and generally strong incrementals on the one hand but the potential mix shift on the other toward lower margin injection molding versus hot runners, if I am reading the building backlog correctly.

So any commentary there would be super helpful..

Yes. So again, if you recall and as you know, the hot runner business snapped back a few quarters ago. So we have seen really good continued growth in the hot runner business around the world and we expect that to continue. And then a couple of quarters ago, we saw a really big increase in orders for our injection molding machines.

Those are now starting to go through the backlog and turn into revenue. And so you will see in the second half and as we go forward a lot higher injection molding equipment which overall brings up brings the EBITDA margin of the segment down.

But inside injection molding that margin continues to increase as we make process improvements and we get the benefit of flow through. So volume is helpful. So margin continues to increase in that injection molding business. But the overall mix puts margin pressure on the segment.

And again, we have seen really good orders on the injection molding side now for a few quarters. These last couple of quarters had strong orders, both in parts and service and the capital equipment. And the hot runner business continues to do well but it sort of saw its big spike, big snap back a few quarters ago..

Yes. And I would just add to that, Dan, our injection molding product lines, we are targeting high teens in that area. So today they are about mid teens margin..

EBITDA margin..

EBITDA margin. With the synergies, continued productivity, increased volume, our target is to get those product lines up near high teens. That's essentially our goal. So over the long term, you are going to see EBITDA margin expansion from that. You are not going to see it necessarily in back half of 2021.

IN 2022, you are going to see some modest improvement. But I think over the long run, you will see that margin increasing..

Very helpful. Maybe last for me and just leverage, you have done an amazing job, down comfortably below two times and falling quickly. Will you shift your focus back towards M&A, opportunistically buying back stock in the near term or kind of remain focused on integration and synergy capture at least for the next few quarters? Thanks..

Yes. Thanks Dan. So you will see and we have been talking about it now for a couple of quarters, we have really sort of turned our attention to profitable growth and that's both organic and inorganic and executing our longer term profitable growth strategies.

I think from the inorganic side, we had a number of projects that we either slowed down or a put on hold at the height of the pandemic and we really were squeezing down costs when there's just a lot of uncertainty in the world. So you are starting to see those investments continue to come back and flow through.

And that that will contribute to revenue growth as we go forward. On the inorganic side, there's not just sort of financial capacity to do deals, there's also management capacity. And we still have a lot of work to do on the Milacron integration. So it's going really well. But we are not finished with that.

And so we do have a significant number of high quality dedicated resources driving the integration of Milacron, ensuring that we get the long term not just the financial benefits from synergies but also the strategic benefits. And so as we look at inorganic growth, we are more likely to do sort of bolt-on or add-on acquisitions inside our platform.

So think high priority would be in our APS segment with the Coperion business where they have both management bandwidth and we also have the financial bandwidth and they have got a very well defined long term growth strategy.

And then as we continue to roll the intensity of resources out of the Milacron acquisition, we will look to do acquisitions more broadly, both within the platforms but also then across the platforms as well. So right now, we are really funding organic growth initiatives, probably more focused on the Coperion business, the APS business.

In terms of inorganic expectations, probably add-on or bolt-on as we continue to execute on the Milacron acquisition..

Makes sense. Thanks again for the color..

Yes. Thanks Dan..

The next question is from John Franzreb of ‎Sidoti & Company. Please proceed with your question..

Good morning Joe and Kristina..

Good morning..

Just going back to the process segment for a bit. Really good growth from the backlog. You alluded to the fact that it's mostly Asia driven. A couple of questions there.

Can you talk a little bit about the North American and maybe European profile/? Are you seeing any increased quotation activity and kind of green shoots that suggests that those priorities might be turning around? And Kristina, you also mentioned the exposure to India.

I wonder if we could talk about which segments you are more exposed to? And maybe if you can give us maybe a sense of how much exposure? And maybe some sort of qualifying number about the risk profile over there?.

Yes. Great. John, thanks and I will start and Kristina can weigh in. So yes, you are right. We have seen strong demand in the APS segment in Asia and particularly in China. It's also been some other countries like Russia and some other places where there's been maybe under investment over the years in plastics production capacity.

The backlog and the pipeline continues to remain strong. In North America, we went through a very big investment cycle that lasted quite a long time with the inexpensive shale gas that was really mainly polyethylene production capacity expansion. We have seen that really come down.

While there are some smaller projects in North America, that backlog or not backlog, I am sorry, that pipeline has come down and we have seen that move more to Asia. Now that's on the big systems. We are also seeing in the engineering plastics, so the more technical plastics, we are also seeing expansion of capacity in Asia.

And then also seeing that in different parts of the world, including North America. And then, I would say, in Europe, Europe is relatively sort of flat to down overall. What we see in Europe mainly is, we see a lot more processed food applications. We are seeing some more technical applications for engineering plastics in Europe.

And as we talked about earlier, more recycling applications in Europe as well. So that might give me a sense of kind of the demand around the globe for some of the plastics production. And then I think the second part of your question was --.

India..

In India..

I am sorry..

Yes. So in India, the main exposure that we have in India is in our injection molding business in India. And injection molding this quarter was probably about half of our MTS segments. And then from the injection molding side, about 25% of its total revenue is in India.

So with that said, we do also use India, given that we have a global supply chain, it does produce some components and assemblies that come to the United States. And so it is an integrated supply chain around the world. But that's the main risk that we saw. In fact, we saw this last year.

I think, in the third quarter last year?.

Yes..

Yes. Third quarter last year, we did see some shutdown in India and it did have an impact, especially in the injection molding business for the quarter last year and then it came back, that pent-up demand then came back..

Got it. Thanks. That's actually very helpful. And then regarding -- go ahead, Joe..

I was going to say, John, I would just say the last thing is, the situation in India is not good. I mean you can look at the news every day. It's really challenging. It has impacted our employees. We have had a significant number of people who have contracted the virus. And it's been a real challenge.

This time around in India feels a little bit different and feels -- it doesn't seem really good in India. I mean, the United States, as you know, is coming back, right. Infections are down. Hospitalizations are down. Mortality is down. But I think the situation in India, it's pretty significant right now..

Yes. And then regarding costs that we deferred a year ago that may or may not be coming back.

Are we fully expensed at this point? Or are there additional costs that we expect to come back online this year that we had deferred for this year?.

Yes. So as we think about the back half of the year, John, we have about $20 million of costs that is going to come back into the back half of the P&L. Half of that is what I would call a return to normal spend, whether it's T&E, sales, marketing, compensation. That really makes up about half of that. Then the other half is investments and growth.

So we are investing in food, recycling some R&D in our MTS businesses. And so you see that investment in the back half as well..

Great. Thanks Kristina for taking my questions..

Have a great day..

Thanks John..

[Operator Instructions]. Our next question is from Chris Howe of Barrington. Please proceed with your question..

Good morning Joe and Kristina. Thanks for taking my questions..

Good morning..

Good morning..

Good morning..

Going off of the MTS segments, can you comment on the segment on an end market basis? How it performed in the quarter on an end then market basis relative to your expectations going into the quarter? And you talked about the backlog, certain markets, custom molders, automotive, construction.

As we get to a full re-opening and a full recovery, hopefully sooner than later, can you talk about the maturation of this backlog and the potential for growing in these specific markets?.

Yes. So interestingly, we have seen strength in virtually every end market, really strong demand. So just as a reminder, the hot runner business is a global business. And it's experienced solid demand for a number of quarters. The injection molding business is more in the United States.

About 80% or 75% United States, India and then a little bit around the rest of the world. And so really where we have seen strong demand is in injection molding businesses in the United States has come back. Demand man is still strong in India. And it's really across the board.

And so we expect orders to continue to be good, both on the capital side and spare parts side. And so we are pretty bullish on the MTS segments from a revenue perspective as well as margins continue to improve there. So good outlook on the MTS segment..

Perfect. And my next question. A little bit outside of the box, but I wanted to focus on spare parts, starting with MTS, injection molding and hot runner. Can you talk about the spare parts as it relates to these pieces of the businesses respectively? And then going on the same topic in APS, service aftermarket is picking up.

Can you talk about the long term potential for the aftermarket peace within APS? Is this more of a return to an absolute level? Or is there some expectation that this can grow as a percent of a more normalized mix?.

Yes. So let me start and then Kristina can weigh in. So in the MTS segment, the vast majority of the aftermarket business is related to injection molding equipment. And so on the hot runner side, those products have a shorter life cycle. There are some replacement parts but they tend to be, it's a relatively small part of the business.

On the injection molding side of the business, it's a much larger part of that business. So we are seeing that demand come back kind of to normal levels. We do expect that to continue to grow and us to grow a bit faster than the market in that segment. And that's pretty good margin business for us.

And so that part of the business, we would expect to continue to grow. So on the APS side, we did have a decline and to be honest with you, we were a little surprised by the decline in aftermarket parts and service on the APS side. We expected service to be lower because it's hard to get people into plants, et cetera.

And what we saw over the last year is, particularly about a year ago we saw a decline in orders, particularly for spare parts for the larger polyolefin plants. And so these are longer cycle spare parts. They are actually in the backlog for four quarters or so. And they are good margin part of that parts and service business.

So we have seen orders come back. And so we are kind of back to where we were pre-pandemic in terms of an absolute orders on the spare parts, parts and service aftermarket in APS.

But what's happening, we are seeing a little bit of mix pressure because we are seeing engineering plastic, shorter cycle spare parts, which are a little bit lower margin coming into revenue faster than the spare parts for the really large systems which are a little bit more profitable.

So we expect that aftermarket part of the business in APS to continue to grow. We expect to see a mix benefit, sort of an intra-category mix benefit where we will get back to more normal kind of profitability in that segment from a product mix perspective.

And then over the long run, Coperion has put a lot of large projects in place and that's a big driver of our spare parts as well as the profitability of the spare parts business. And so we expect a long runway of good growth in aftermarket parts and service as those larger systems continue to age around the world.

And we are close to those customers and feel like we can manage that demand really well and do a good job of keeping that demand. So again, I think also some retrofits and rebuilds that were pushed out, we will start to see those coming through. So we expect the parts and service business to continue to grow.

And then given the number of large projects we have done as a percentage of revenue, it will continue to increase on a long term trend..

Yes. And just as that relates to total revenue, remember, we have got this strong backlog..

Yes..

So we have got, while we are going to see growth in spare parts and aftermarket, you are going to see the growth in these large projects as well..

The capital side of the business..

Yes. The capital side of the business..

That's perfect. Thank you John and Kristina. I will hop back in the queue. I appreciate it..

Thanks Chris..

Thanks Chris..

There are no additional questions at this time. I would like to turn the call back to Joe Raver for closing remarks..

Well, first of all, I thank everyone for joining us on the call today. We appreciate your ownership and/or interest in Hillenbrand. As we head into the second half of the year, we continue to remain very focused on supply chain resiliency and handling the COVID infections and hot spots around the world.

We have got a good history of doing that and really build a lot of flexibility into our supply chain. But we will continue to manage that. You will notice in our remarks and we are very focused now on capturing growth opportunities, investing for growth and turning that into cash flow. We remain focused on the integration.

We believe it's going very well. It's really great to see those businesses performing better on the MTS side and we continue to drive the integration.

And then finally, given the strength of our balance sheet and the debt that we have paid down over the past 12 months, we continue to look at investments and both organically and inorganically again for profitable growth. So we look for to talking to you again in August when we return report our third quarter results.

Have a great day everyone and thank you..

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation..