Greetings, welcome to the Hillenbrand's Second Quarter Fiscal Year 2023 Earnings Call. At this time, all participants are in listen-only mode. [Operator Instructions] Please note, this conference is being recorded. At this time, I'll turn the conference over to Sam Mynsberge, Vice President, Investor Relations. Sam, you may now begin..

Thank you, operator, and good morning, everyone. Welcome to Hillenbrand's conference call for our fiscal second quarter of 2023. I am joined by our President and CEO, Kim Ryan; and our Senior Vice President and CFO, Bob VanHimbergen.

I'd like to direct your attention to the supplemental slides posted on our IR website that will be referenced on today's call. As a reminder, the divested Batesville segment is classified as discontinued operations for all periods presented. And our commentary will be based on the performance of our continuing operations.

Turning to Slide 3, a reminder that our comments may contain certain forward-looking statements that are subject to the Safe Harbor provisions of the securities laws. These statements are not guarantees of future performance and our actual results could differ materially.

Also, during the course of this call, we will be discussing certain non-GAAP operating performance measures, including organic comparisons for our segments, which exclude the impact of acquisitions, divestitures and foreign currency exchange.

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

Kim?.

Thank you, Sam. And good morning, everyone. Thank you for joining us today.

With the previously announced completion of our Batesville divestiture in February, we have significantly transformed our organization to be focused on delivering highly engineered, mission-critical industrial processing solutions into end markets that are underpinned by long-term secular growth trends.

As you know, our primary focus is on the end markets of durable plastics, recycling and food.

At the core of these markets is a common foundation of material processing requirements that allow us to leverage our strengths across the enterprise, and where the expanding global middle class and an increased focus on sustainable solutions are key factors driving demand for both increased quantity and quality of products that can be produced on our equipment.

Over the past year, we've acquired additional capabilities. And by combining them with our existing Coperion technologies, we've enhanced the breadth of our unique end-to-end solutions. We're making good progress on integrating these acquisitions.

And we continue to identify opportunities to leverage our complementary technologies, leading brands, and deep applications expertise to provide superior benefits for our customers and long-term value for our shareholders. Now I'll provide a summary of our performance and an update on the overall demand environment.

I'm pleased with our performance this quarter as we delivered strong revenue growth and earnings per share that exceeded the high-end of our guidance. I'm very proud of the way our associates have continued to execute our strategy as they navigate a dynamic macro environment.

I'm truly grateful for the hard work of our over 9,000 employees around the world to shape what matters for tomorrow. Consolidated revenue for the quarter grew 22% primarily driven by our contributions from our recent acquisitions and robust organic growth in our APS segment.

We continue to see strong order performance within APS including record orders for aftermarket parts and service. And we were encouraged by sequential order improvement within MTS, leading to another quarter of record total backlog. I'll now spend a moment providing more detail on what we're seeing across our end markets.

Overall, the demand pipeline remains healthy across APS. And with MTS, we are seeing signs of improvement. That said we continue to experience a cautious approach by some customers, as the timing of investment decisions remained extended throughout the quarter. Let's begin with the MTS segment.

We saw a sequential improvement in orders, revenue and margin in the quarter with a record level of revenue from our injection molding product line, as the teams did a great job of executing products from the backlog. But, as anticipated, orders remained soft across the segment, particularly for our higher margin hot runner equipment.

We continued to see customer decision delays across key end markets and geographies. Order pipelines are improving and we do expect to return to a more normal demand environment as we move through the back half of the fiscal year.

Along with that, we also expect to see a pickup in margins due to more favorable product mix, as the demand for hot runners improves over the next two quarters. Now on to APS. Let's start where we've made our most recent investments. First, with food.

The order pipeline for new equipment is at a record level with strong demand outlook for North America and Europe, particularly in the areas of baked goods and pet food. While we did see some customer decision delays in the quarter, we continue to focus the business on pipeline development.

The integration of LINXIS, Peerless and Gabler remains on track, and we continue to identify opportunities with customers to sell solutions that leverage the capabilities of our extended product portfolio. Turning to recycling.

With the combination of our Coperion, extrusion and material handling systems, and our recently acquired Herbold shredding, washing and grinding equipment, we are in a unique position to provide complete plastics recycling solutions.

The exceptional receptivity from customers regarding the value we can provide continues to outpace expectations, and the pipeline of orders has grown rapidly.

We are also starting to see the scale of these customer investments increase, particularly in Europe and North America, but we also expect to see strong demand in India and the Middle East over the quarters and years ahead. Our integration continues to progress as planned.

And finally, our core and growth platform of durable plastics within our APS segment. As we've communicated over the past few quarters, we continue to see a strong investment cycle for polyolefin and engineering plastics.

Demand remains stable in China and India and the Middle East remains an attractive region as well for growth, particularly for large polyolefin projects. The scale of these projects continues to increase as customers look to maximize the efficiency of their investments.

And this plays to our strengths as a leading global provider of high output, extrusion and material handling system. We're also seeing strong demand for aftermarket parts and service, particularly in North America, which continues to indicate the critical need to support customers throughout the life of their equipment and systems.

Overall, for APS, we continue to see good demand across our key end markets and we're further bolstered by our record backlog heading into the second half of the fiscal year, which gives us visibility and confidence in our outlook as Bob will discuss in more detail later on the call.

Moving forward, our teams are laser focused on deploying the Hillenbrand operating model to drive productivity in our operations and integrate our recent acquisitions, while also aggressively managing discretionary costs over the near-term.

We remain confident in the foundation we've built to drive long-term profitable growth and shareholder value creation. I'll now turn the call over to Bob to provide a more detailed overview of our financial performance and outlook for the remainder of the year..

driving profitable growth through attractive organic and inorganic investment opportunities, returning cash to shareholders through our attractive dividend policy, and opportunistic share repurchases, and maintaining an appropriate leverage profile with a target net leverage of 1.7x to 2.7x.

As we make progress integrating our recent acquisitions, we continue to evaluate potential strategic acquisitions that strengthen our capabilities in key end markets, accelerate our profitable growth strategy and those that will provide a strong return to shareholders over the long term. Now moving to Slide 12.

As we enter the second half of the fiscal year, we are updating our guidance based on performance in the first half as well as what we see in current demand and operating environment. Our guidance now assumes slightly increased expected revenue of approximately $2.81 billion to $2.86 billion for the year, previously $2.77 billion to $2.86 billion.

We are maintaining the midpoint of our adjusted EPS range while narrowing slightly to $3.30 to $3.50 per share from a previous range of $3.25 to $3.55 per share. Now turning to the segments. For APS, we are refining our expected annual revenue range to be $1.8 billion to $1.83 billion, previously $1.79 billion to $1.84 billion.

Our assumption for underlying organic growth remains strong at approximately 10% to 12%. We are lowering our expectations for adjusted EBITDA margin to be in the range of 18.5% to 19%, previously 19% to 20%, primarily due to unfavorable product mix and the dilutive effect of price cost that has remained more elevated than anticipated.

This guidance reflects underlying organic margin expansion of 40 basis points to 90 basis points. For MTS, we are slightly raising our expected annual revenue range to be $1.01 billion to $1.03 billion, previously $980 million to $1.02 billion.

We are maintaining our previous guidance for EBITDA margin in the range of 19% to 20% based on the expected product mix in the second half of the year.

With the ongoing macro uncertainty, we are providing a Q3 guidance range for adjusted EPS, which we expect to be $0.88 to $0.94, which reflects year-over-year growth on a continuing operations basis of 28% to 36% and strong sequential improvements in both segments. Please review Slide 12 for additional guidance assumptions.

With that, I'll turn the call back over to Kim..

First, leveraging our leading brands with strong competitive positions in large and growing end markets; Second, enhancing our growth by leveraging our large installed base to drive profitable aftermarket expansion and by expanding our capabilities through strategic M&A; Third, utilizing the Hillenbrand operating model to drive sustained operational improvements, productivity and synergies; And finally, by deploying capital towards high-return opportunities and returning cash to shareholders through dividends and opportunistic share repurchase.

Finally, I'm pleased to highlight that we will publish our fourth annual sustainability report later this month, and we look forward to sharing our continued progress with you. Now we'll open the line for questions..

[Operator Instructions] And our first question is from the line of Daniel Moore with CJS Securities..

I'll start with APS, which remains remarkably strong, particularly at this point in "the cycle." Obviously, you've seen a nice pickup in food, pharma, et cetera.

But in terms of polyolefins, when should we start to expect backlog to tick lower? And would that, in fact, be a good thing as lead times are maybe a bit stretched out at this point?.

Yes. I would say we continue to see a strong pipeline there. And I think that as you just continue to see some of those macro trends around the investments we've seen in China over the last several years.

Now you're seeing investments in India as they try and address their own domestic needs, but also some of the transfer of manufacturing that has moved into those regions. You see the Middle East investing.

These typically move in regional swaps, and we just continue to see the demand for that product in these regions to take advantage of natural resources in each of the regions and be able to address market demands for those -- in a variety of end markets.

And that growing global middle class is the key driver all around the world for the continued demand in these products. To your point, Dan, I do think that we are the largest backlog we've ever had. Lead times are certainly very extended, and it takes a lot of extra touches to manage the backlog this big.

So over time, we would like to see that move down to a more optimal level that allows us to have more efficient touches of the backlog.

But right now, we're responding to customer demands and are grateful to have so many customers that depend on us for their jobs all around the world in terms of helping them not just on sales but also on service, which also did very well in the quarter and has been a part of the building backlog..

Yes, Dan, and may be what I would add, right, is as Kim mentioned, the operations. We continue to focus on lead time reductions and the application of the Hillenbrand operating model is proven to be successful within APS. And so we still see obviously pipeline and strong demand, but we continue to push more off the door..

Perfect. I'll switch gears. Maybe to lineate as you have in the past, but between injection molding, which generally has kind of longer lead times versus hot runners, more of a quick turn business and when hot runner demand, it usually turns -- when it turns, it turns quickly.

So talk about sequential order activity thus far in Q3 and your confidence in the sustainability of that sequential improvement as we get into the back half of the year, particularly on the hot runner side?.

Yes. So Dan, it's still early in the month and so we're still closing the books. But I would say what we've seen so far in April, we continue to see a strong pipeline, customer decisions and that timing associated with making those decisions is still fluid. But I'd tell you there's really been no surprises in the month.

We did have sequential improvement in Q2 versus Q1 as we had in our prepared remarks and saw about a 6% improvement in orders in the quarter versus Q1. And again, strong pipelines, but customer orders are just fluid right now.

So we feel encouraged about the activity, but just being -- I guess I should say we're recognizing the fluidity of ultimate customer decisions in our guidance..

And one more, and I'll jump back, but just a follow-up there. Overall, it sounds like you -- the expectation is that orders will pick up on the MTS side in the back half of the year.

Maybe talk about some of the guideposts and signposts that you have, if it's just your current pipeline in discussions with customers that give you confidence there? And when do we need to see orders for injection molding to pick back up to generate the kind of maybe longer-term mid-single-digit growth that is the expectation over the longer term as we think about fiscal '24?.

Yes. So when do we need to see that? The lead times in the injection molding side of the business are -- it can be anywhere from six to 12 to 15 months, depending on the size of the project. Some of the projects that we are seeing some of that fluidity, is kind of those midterm projects, so I think nine to 12 months.

And so we certainly are expecting that those projects will start breaking loose here in the next quarter or so, is what we're anticipating in the next quarter or two. So those are the watch signs we're watching in the injection molding side of the business. And as you mentioned, on the hot runner side of the business, that is a much shorter lead time.

What is -- what we're really seeing is a lot of activity relative to discussions with customers, particularly in certain geographies around projects that are starting up. But again, a lot of these folks have not been able to work collaboratively kind of in a normal sales cycle until just the last few months.

And so to a certain degree, we're starting those processes and sometimes those new lines, which is what we're seeing in -- specifically in India. Those are new lines that are starting up. We're seeing a little bit longer lead time as we do the preparations and some of the design work for those types of jobs.

And so the -- typically, the sales cycle on those is, call it, a quarter -- typically a quarter. Maybe on a much larger, multiline project, maybe as much as six months, but that is typically a much shorter-term business for us. And so we'll get that turned around. We'll get those revenues in if we start seeing the pickup in decision timing.

Then we'll start to experience that quickly in the financials..

Really helpful. I got some questions around recycling and food, but I'll jump back in queue if any will cover..

Our next question is from the line of Matt Summerville with D.A. Davidson..

A couple of questions. You mentioned in your prepared remarks that the acquisition contributions may be a bit less versus expectations.

On a pro forma basis, what did organic growth look like for the acquisitions in the quarter? And can you put a finer point around what might be driving some of the delays in volumes that you highlighted, particularly on the food side of the business?.

I'll let Bob kind of look through and see what we've got handy that we can reference in the pro forma. I'm not sure that we have anything specifically handing on that topic, but we can certainly get back to you on that.

Relative to what we saw in demand, it's really, frankly, just a little bit of a slowdown that we saw in any market, with just delayed customer decisions or elongated decision time lines for some of these projects. Remember that we've acquired businesses that are -- the LINXIS businesses specifically are smaller businesses.

They were not closing on quarters and driving for quarterly performance in the same way because they were not publicly held. They were smaller businesses. And so we're really working with them on their processes of being really clear on exactly how -- what the timing is going to be on closes.

And so I think there was probably some optimism on our part on kind of how quickly some of these orders would close or exactly how the timing would work, but I think we're continuing to get better every month in terms of the processes that we have around our controls and our estimates in these new businesses.

We continue -- I think the most important thing is do we see a robust pipeline? Are we seeing good interest? Are we seeing good traction in terms of being able to add different parts of the portfolio into the discussions that we're having with customers on these lines.

And all of those are really positive signs in terms of the businesses to work collaboratively together and offer all of the value of the full portfolio now as opposed to just pieces and parts and individual pieces of equipment. And those signs are all really, really positive.

And so we're really bringing that systems approach into the businesses and again, making really good progress on the timing of quarterly close, the improving of the accuracy of the estimates that they're making as businesses. And all of those things are -- we're still early days. We're in the fifth month of owning these businesses.

So we're pleased to date, but we'll have some -- we'll just have some time that it's going to take us to make sure that everything runs exactly like it does in the main base business..

Yes. And then Matt, just the way I think about just the acquisitions, I would say that the acquisitions in total probably underperformed in the quarter top line, probably, call it, $6 million to $8 million in revenue, really, again, just based on timing of customer decisions. And so we still see strong pipelines moving forward.

But that's the way I'd think about the M&A piece..

Got it. And then just I want to talk a minute about price.

I think APS was up 11% organic, MTS up 7%, if I had the numbers right, how much of that growth is being driven by price versus volume?.

Bear with me here. It's probably about 4% on price in the quarter, Matt..

Got it. And then kind of to a little bit what you were talking about during the last round of questions. With respect to MTS, you're talking about the hot runner business starting to do better, even though it doesn't sound like you have orders necessarily in hand to kind of dictate that cadence.

So I guess I'm curious as to what gives you the confidence that hot runners might be improving, how that informs you about the macro environment, what markets and geographies might be driving that for you guys?.

So the markets where we'll see that as we will -- we are expecting that we will see a pickup -- sorry, Rob and myself, I'm sorry.

We're expecting that we'll see some pickup in our normal markets like China, which has been, as you know, for the hot runner business, that's a very prevalent market for us and has been one that has been really affected by some of the activities over the last several quarters where travel was not very -- it just wasn't possible in a number of quarters.

And so we're really restarting -- as we mentioned in last quarter's call, we were really just restarting those conversations. So it is about pipeline in China and really getting those projects across the finish line.

From a decision standpoint, I would say that we are also seeing a lot of interest in India as continued suppliers move into that India market.

And if I was to kind of do a heat map of today versus where we see these markets over the next 12 months, all of our resources on the ground really give us confidence that they are -- while they are still kind of slow in the decision-making process right now that their expectations over the next 12 months and the indications on our quoting pipeline would indicate that we would expect to see improvement.

And remember, we play in a lot of different end markets, automotive, consumer goods, packaging, medical, electronics. And so there are a lot of places to be paying attention to trends that will be opportunistic for us to be chasing in those markets. Hopefully, that helps to clarify a little bit of that, Matt..

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

It seems like everyone's rightfully focused on the opportunity pipeline and possibly the duration of it. I, myself, I'm surprised how strong it's been in light of macroeconomic conditions. But you suggest that it has sustainability not only into the current quarter, but maybe beyond that.

When you think about the opportunity pipeline, how long do you expect to see at this elevated level, given what you're holding right now?.

In terms of -- are you speaking on -- more on the APS side or the MTS side or kind of broadly?.

Broadly..

Okay. All right. So let me kind of address a couple of things and a couple of chunks to maybe think about. So let's talk about the base plastics business that we have in both our APS and MTS segments. We've continued to see -- we continue to see in various geographies, those investments continue.

And as we've mentioned, we've continued to see China stay very stable but high relative to, for instance, where it was several years ago. There have been a lot of investments there.

We are still working on projects that have been in flight for, frankly, a couple of years now, and we're just able to get in and do service work and start doing commissioning at sites and those types of things to bring these longtime projects to fruition and to start up.

And so we expect that we'll continue to see revenues in those areas, as we continue to complete projects. But the demand there remains high. We've also seen incremental activity in terms of our conversations with customers who are investing in India.

Much of that India growth is driven by, frankly, a lot of people wanting to make sure that they have another Asia footprint that is not specifically in China. And so there are investment opportunities that are coming in India. We're also seeing investments again in the Middle East.

And all of those have an initial investment in capital, but then those will be followed up by investments in the service and in maintaining those lines. So those are -- so I do expect that to be a longer duration. I mean, once these projects start, they are 24 to 30 months during the build process.

And then when they commission and come online, then you've got parts and service that will come as a result of those investments. So those are pretty long in duration. When we think about some of the demand that we're seeing in other end markets like recycling, I expect that to just increase. I don't think that's a cycle per se right now.

That's just a hyper investment all around the world and people who realize that this is something that is going to be absolutely required from many of these major manufacturers to have some type of capabilities for recycling, whether it's just post industrial use and what's going on in their own facilities or them elongating their own reach and vertical integration by becoming more capable of producing recycled or different types of products, biopolymers, those types of things.

So that is going to be just a hyper-investment cycle. Now primarily, we're seeing it in North America and Europe right now, but we absolutely expect that, that will continue to have increased investments in Asia and also the Middle East over time as people continue the need to have a way to deal with plastic materials and be able to reuse them.

So that recycling area, I don't think that's a cycle for the foreseeable future. That is just key investments that are going to be happening. And then on the food side, as this is growing global middle class, again, we are seeing expansion of capacity to address this growing global middle class.

I mean these were why these key markets were so important to us, not just because we had capabilities that could be extended into these markets, but because the markets themselves were attractive over the long term and had long-term secular investment and growth trends that we believe will be very advantageous for our capabilities to address them and for our shareholders to take advantage of these growing markets..

Perfect. And I guess just a little bit more granular of a question. The aftermarket business was relatively good. Was that a function of low inventories at the customer levels, I don't know, new channels that you're addressing or maybe something on the service mix.

Can you just talk a little bit about what's going on in the aftermarket?.

Yes. I will let Bob address some of -- I'll just hit it at kind of high level.

I think there has been some pent-up demand and not -- I wouldn't say that all of the increase that we've seen is pent up demand, I will certainly say that the increment of service that has been being done, which actually affected our margins a bit in APS because there's a decent differential between parts and service margins.

So we did see great volume and a lot of utilization of our service teams, but a lot of that was addressing some service work that needed to be done and some of that comes at lower margin than, for instance, some of the proprietary parts that we sell. So that aftermarket business, we've had a large capital investment cycle over the last several years.

So -- and we've been calling from a number of quarters that one of the things that we expected to see was an increase in our aftermarket business as a result of those capital investments because they hit time periods where parts and where standard maintenance or debottlenecking or modernization, all of which we do as a part of our relationship -- ongoing relationship with customers.

It's just time from those original capital investments to -- for customers to be addressing some of those types of needs, and we've got a global service team that has -- that just does a spectacular job of being there to address those needs for customers all around the world..

Yes. And the only thing I would add, John, is both businesses saw a book-to-bill over 1. And so we're seeing it across the entire portfolio, and there's some pricing in there as well. And as Kim mentioned, today and in the past, right, it's been a strategic focus for us to grow that aftermarket business.

And so we're seeing it in the results in the quarter..

Well, I guess one last question.

Regarding the reduction in the EBITDA margins for APS, how much of it is that mix in aftermarket? And what is the other important factor we should be thinking about in the lower margin profile in APS now versus, say, three months ago?.

Yes, there's probably 1/3 of that reduction relates to mix. The other piece is that we had that's putting pressure on it would be the price costs that we saw in Q2 were still above 100% for the quarter and for the year, but just a little bit more pressure on the pricing side.

And then there's some incremental investments we made in battery and food really just rounding out the drop in the margins, John..

Thank you. At this time, I'll now turn the floor back to management for further remarks..

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

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