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Edited Transcript of HI earnings conference call or presentation 14-Nov-19 1:00pm GMT

Q4 2019 Hillenbrand Inc Earnings Call

BATESVILLE Nov 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Hillenbrand Inc earnings conference call or presentation Thursday, November 14, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Joe A. Raver

Hillenbrand, Inc. - President, CEO & Director

* Kristina A. Cerniglia

Hillenbrand, Inc. - Senior VP & CFO

* Richard A. Dudley

Hillenbrand, Inc. - Director of IR

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Conference Call Participants

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* Daniel Joseph Moore

CJS Securities, Inc. - Director of Research

* John Edward Franzreb

Sidoti & Company, LLC - Senior Equity Analyst

* Matt J. Summerville

D.A. Davidson & Co., Research Division - MD & Senior Analyst

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Presentation

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Operator [1]

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Good morning, everyone, and welcome to Hillenbrand's Earnings Teleconference for the Fourth Quarter of Fiscal 2019. A replay of this call will be available until midnight Eastern Time, November 28, 2019, by dialing 1 (800) 585-8367 toll-free in the United States and Canada or +1 (416) 621-4642 internationally and using the conference ID number 2084256. This webcast will be archived on the company's website at ir.hillenbrand.com through December 13, 2019. 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.

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Richard A. Dudley, Hillenbrand, Inc. - Director of IR [2]

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Thank you, operator. Good morning, everyone, and welcome to Hillenbrand's Fourth Quarter Fiscal 2019 Conference Call. I'm joined by our President and CEO, Joe Raver, along with our Senior Vice President and CFO, Kristina Cerniglia.

During today's call, we'll discuss fourth quarter and full year financial results, the outlook for our businesses for fiscal year 2020, and we'll provide an update on our pending acquisition of Milacron. We'll then open the call up for Q&A.

While we recognize there is a lot of interest in Milacron's performance, we remain separate companies until closing, and we will not be addressing any questions regarding their future outlook or their quarterly results, and we appreciate you focusing your questions on Hillenbrand-specific topics.

Before we get to the results, 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 3 and 4 of the slide presentation and our 10-K, which can be found on our website for a deeper discussion of transaction-related matters, forward-looking statements and the risk factors that could impact our actual results.

Now I'd like to turn the call over to Joe.

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Joe A. Raver, Hillenbrand, Inc. - President, CEO & Director [3]

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Thanks, Rich. Good morning, everyone. Our vision at Hillenbrand is to build a world-class global diversified industrial company with a proven record of success, driven by the Hillenbrand Operating Model. Our mission is to create exceptional value for our customers, provide great professional opportunities for our employees, to be responsible for the communities in which we operate and deliver value to our shareholders.

Our profitable growth strategy has 4 key pillars. The first is to strengthen and build business platforms to achieve scale, both economically and in the marketplace. The second is to build a scalable foundation for growth, utilizing the Hillenbrand Operating Model. Third is to run Batesville for cash flow. And the fourth is to effectively deploy that strong free cash flow to create shareholder value.

We made progress executing our strategy in fiscal 2019 and finished the year with solid fourth quarter financial results, including record revenue and adjusted earnings per share.

We're encouraged by the continued growth in large polyolefin systems at Coperion as well as Batesville's resiliency in delivering healthy margins and cash flow in a challenging demand environment.

During the year, we completed the successful integration of BM&M Screening Solutions within our separation business. And now we're preparing to integrate Milacron, which is the largest acquisition in our history, and which represents the next major step in our transformation.

The Milacron acquisition is very well aligned with our strategy. We're acquiring good businesses with leading brands and strong technology.

We're adding 2 sizable platform businesses to our portfolio, which along with our Coperion business will be our main focus for future investment and growth. In the near term, we expect to achieve $50 million in run rate cost synergies by the end of year 3 as we get the benefits of scale related to redundant public company costs, procurement and other operational efficiencies driven by the application of the Hillenbrand Operating Model. And over the medium to longer term, we expect to drive revenue synergies through cross-selling and shared innovation.

As you may have seen a couple of days ago, Milacron reported their fiscal third quarter results that showed the impact from industry headwinds, the effects of the global slowdown and trade tensions, not very different from some of the challenges that we are facing in parts of our business and that we have managed through effectively in the past.

Milacron's third quarter earnings do not change our belief that this is a highly strategic, long-term transformational acquisition. And we remain confident in achieving $50 million in targeted cost synergies and creating long-term shareholder value.

For those of you unfamiliar with Milacron, let me give you a quick snapshot of who Milacron is and why we're excited about the opportunity ahead of us.

Milacron is a global leader in highly engineered and customized systems in plastic technology and processing, with more than $1 billion in annual revenue. They have strong industry positions in brands, and in particular, are recognized as a leader in hot runner systems, injection molding equipment and metalworking fluids.

Milacron operates in 3 segments. First is the Melt Delivery and Control Systems business, or MDCS. MDCS designs and manufactures highly engineered, technically advanced hot runner and process control systems, mold bases and components. Milacron is well-known for its Mold-Masters brand, which is a global leader in the industries that it serves.

Second is the Advanced Plastics Processing Technologies business, or APPT. APPT designs and manufactures plastics processing equipment and systems, including injection molding, extrusion and auxiliary systems under the Milacron brand. In injection molding equipment, Milacron is a recognized leader in North America and India.

And third is the fluids business, operating under the CIMCOOL brand. CIMCOOL provides metalworking fluids that help its customers reduce production costs. It's a strong business with attractive financial metrics and a global presence. We continue to believe in the compelling strategic merits of the deal. We expect Hillenbrand and Milacron will be stronger together. We think there is an untapped opportunity for Hillenbrand to become a leader across the plastics value chain with expanded capabilities and increased global scale.

Today, we are strong in base resin production and engineering plastics, and we have emerging capabilities in extruded products and recycling. Milacron will expand our product offering in these areas and extend our reach into durable plastics processing where plastics is shaped into end products.

We believe that our deep expertise across all these processes will foster innovation and enable us to capitalize on emerging trends across the industry, including innovations in biodegradable plastics and recycling.

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

It's important to highlight that Milacron's equipment is more focused on durable plastic products rather than single-use products.

Since we announced the proposed combination in July, we've made substantial progress towards closing the transaction, while diligently planning the integration process and day 1 readiness.

We have our best people leading the integration and have also partnered with a leading consulting firm to provide structure and oversight. We kicked off the process with the development of a centralized integration management office, led by our Vice President of the Hillenbrand Operating Model, Jim Hooven, and dedicated integration teams across key functional areas. These teams are working on day 1 through day 100 readiness, a combined organizational model and structure and synergy achievement.

In short, we're preparing to hit the ground running on day 1. The structure we've set up enables us to remain focused on running our core businesses, while dedicated integration teams drive synergy realization.

As a reminder, we expect to generate annualized run rate cost synergies of approximately $50 million within 3 years with a significant portion coming from reduced public company costs.

Our 2 companies are highly complementary with limited commercial overlap. So we expect minimal disruption to the core businesses as we execute our synergy plans.

We're confident in our ability to effectively integrate and help make the combined businesses better. We've done this before with our successful acquisition of Coperion, and we think we can apply that experience here. We'll share additional details on progress after the transaction has closed and in subsequent earnings calls.

In terms of timing, we've received all reasonably anticipated regulatory approvals for the transaction. The completion of the merger is also conditioned on the approval of Milacron's shareholders. Milacron is holding a special meeting on November 20 to seek their approval.

In addition to the shareholder vote, there are certain other customary conditions that need to be met in order to close. While we don't anticipate any issues, we can't predict with certainty the satisfaction of these conditions nor the specific timing of the close.

The merger agreement provides that the transaction is to close within 3 business days of all conditions being satisfied.

Beyond that, we're focused on running the business and delivering a seamless transition for all customers. We'll be monitoring the integration, and I will personally ensure that we maintain an acute sense of urgency to address any issues that may arise. Our team understands the significance of the work ahead, and we can't wait to get started. With that, let me now turn to our results.

As you may have seen in our press release, we delivered record revenue, record earnings and strong operating cash flow for the quarter.

Turning to the Process Equipment Group. As we have seen throughout the year, plastics remained a bright spot, even as other industrial end markets continued to face sluggish demand. The outlook for new polyolefin projects remains positive, with capacity expansion expected to continue in the U.S. and Asia.

We believe we are well positioned to win at least our share of announced projects. We have deep applications expertise and the unique ability to provide comprehensive end-to-end solutions for large polyolefin systems, competitive advantages we credit for making us the partner of choice for some of the largest, most challenging projects in the world.

We continue to deliver innovative solutions to meet our customers' demand for higher volume, more efficient equipment. In addition, we are making our extruders and compounding machines smarter with features like digital diagnostic and monitoring functions that contribute to increased productivity and customer value.

These innovations have also helped Coperion win aftermarket business. Our customers appreciate the expertise we bring when performing service or modernizing plants to ensure they maintain optimal system throughput, efficiency and uptime. We believe our growing installed base represents a significant opportunity to capitalize on the aftermarket business in the future.

Moving to the engineered plastics part of the business. Demand for equipment remained stable over the past quarter, and our long-term outlook remains positive. We currently see softness, driven by reduced demand in the automotive industry, but that softness was partly offset by investment in capacity for specific types of plastics, such as ABS and polycarbonate.

In food and pharmaceutical applications, we finished the year with modest growth. In general, we've seen stability in these markets, although there has been limited activity around large projects recently. We're focused on continuing to grow by leveraging our technical capabilities and applications expertise in addition to introducing innovative new products. For example, Coperion K-Tron recently introduced its next generation of feeding technology ideally suited for high-value applications requiring high levels of accuracy. These markets remain attractive, and we believe there's solid growth potential for the future.

As expected, the other industrial businesses in the Process Equipment Group continue to face sluggish demand in the fourth quarter.

Capital equipment sales were down year-over-year, driven by slowing demand in proppants, mining and forest products.

Parts and service revenue grew modestly in the quarter, even in the face of unfavorable comparisons in profits.

In flow control, we continue to feel the effects of a slowdown in the mining and industrial markets in the U.S. and Europe.

On the other hand, we've seen some encouraging signs of activity picking up in municipal markets.

In total, the flow control businesses delivered modest sequential improvements in both revenue and order volume in the fourth quarter.

Overall, for the Process Equipment Group, we continued to see good momentum in large capital projects for plastics coming out of the fourth quarter.

Going into the new fiscal year, we have a strong backlog and robust pipeline of new polyolefin projects. However, other industrial end markets faced continued weakness in the current challenging macroeconomic environment. Kristina will discuss these implications for our fiscal 2020 guidance later in the call.

Now let me comment on Batesville. Our strategy for the Batesville business is to build on our leadership position and leverage the Hillenbrand Operating Model to run the business as efficiently as possible and generate strong, predictable cash flow to fuel Hillenbrand's growth initiatives. Those of you who are familiar with the business, understand that Batesville is facing a secular decline in burial casket demand, primarily due to the estimated increase in the rate at which families opt for cremation.

Revenue was essentially flat in the fourth quarter compared to the prior year despite lower burial demand and was at the low end of our expected range for the full year.

Margin performance was solid for the quarter as Batesville realized productivity gains and the benefits of targeted restructuring actions undertaken last quarter.

We continue to employ the Hillenbrand Operating Model to help manage the business in a declining demand environment. And we're continually working to improve efficiency, reduce costs and operate a lean and flexible organization.

Before turning the call over to Kristina, let me briefly discuss Hillenbrand's signing of the United Nations Global Compact in late September. We've taken a voluntary pledge to develop and execute corporate responsibility programs and to increase disclosures of our sustainable business practices. We joined over 9,500 other companies to more closely align our business strategies to universally accepted principles in the areas of human rights, labor, environment and anticorruption. Being a responsible corporate citizen is embedded in our mission and core values, and we look forward to increasing our commitment to the UNGC principles.

I'll now turn the call over to Kristina for more detail on our results and guidance. Kristina?

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Kristina A. Cerniglia, Hillenbrand, Inc. - Senior VP & CFO [4]

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Thanks, Joe, and good morning, everyone. I'll start with our fourth quarter results. We reported total revenue of $486 million for the quarter, an increase of 2% over the prior year. Excluding FX, revenue grew 4%. The growth was driven primarily by the Process Equipment Group, increasing 3%, which includes 1% from the acquisition of BM&M. Batesville's revenue was essentially flat year-over-year.

Adjusted EBITDA of $87 million increased 7% over the prior year. And adjusted EBITDA margin of 17.9% expanded 80 basis points, primarily driven by pricing and productivity improvements, which more than offset product mix and cost inflation. I will provide more details about our margin performance when I review segment results.

GAAP net income of $25 million or $0.39 per share was down $0.31 per share compared to last year, largely as a result of acquisition costs and restructuring charges. These costs were approximately $31 million in total for the fourth quarter compared to $2 million in fiscal 2018.

Adjusted net income of $48 million or $0.76 per share increased $0.09 or 13% year-over-year. The adjusted effective tax rate for the quarter was 26.7%. We generated solid operating cash flow of $69 million in the quarter, that was about $23 million lower than last year's fourth quarter, primarily due to acquisition and integration costs. We also returned $13 million to our shareholders in the form of cash dividends.

Turning to the next slide. Let me cover segment performance beginning with the Process Equipment Group.

Process Equipment Group revenue of $350 million grew 3% compared to the prior year. Excluding the impact of foreign currency exchange, revenue increased 6%. Revenue growth was primarily driven by continued demand for large extrusion systems for plastics production. That growth was offset by softness in capital equipment sales across other industrial end markets where we experienced slower demand with some projects pushing out. The parts and service business grew 3% in the quarter or 5% excluding foreign currency exchange.

Adjusted EBITDA margin of 19% increased 70 basis points, primarily as a result of pricing and continued productivity improvements, driven by strategic sourcing initiatives and targeted restructuring actions. This margin was partially offset by the increased proportion of lower-margin large system projects and by cost inflation. As expected, we continue to see a higher proportion of large polyolefin system projects, which carry a lower margin and a lower proportion of mineral separators used to screen profits. We expect this trend to continue as we head into fiscal year 2020. And while large systems projects create some margin pressure over the short term, the growing installed base of these systems leads to new opportunities for higher-margin parts and service revenue in the future.

Order backlog of $864 million at the end of the fourth quarter increased 6% over the prior year or 10% excluding the negative foreign currency impact. Backlog decreased 8% sequentially compared to the third quarter, largely as a result of the timing of large systems. These systems projects continue to comprise about half of the backlog and are expected to contribute to revenue over the next several quarters.

As Joe mentioned, we have a favorable outlook of the polyolefin project pipeline with continued investment in new capacity expected in the U.S., China and other parts of Asia. We see this as a great opportunity to continue expanding our installed base of polyolefin production system.

Moving to the Batesville business. Batesville revenue of $136 million was essentially flat compared to the prior year, despite lower demand for burial caskets. Adjusted EBITDA margin of 22.6% was 150 basis points higher than the prior year, mainly driven by pricing and productivity gains, which more than offset cost inflation and lower volume.

As Joe mentioned, we started to see the benefits of targeted restructuring actions we commenced last quarter to help stabilize the margins.

Batesville's adjusted EBITDA margin for the full year was 21.4%, and we expect the business to be in the range of 20% to 21% in the fiscal year 2020.

Moving to annual results. Consolidated revenue of $1.8 billion grew 2% or 5% excluding the impact of foreign currency. Process Equipment Group revenue of $1.3 billion increased 5% or 8% excluding FX, as demand for plastics projects remained strong throughout the year. The growth in the Process Equipment Group was partially offset by lower demand for burial caskets in Batesville segment. Batesville's revenue of $533 million was down 3% for the year. The acquisition of BM&M Screening Solutions in November of 2018 contributed approximately 1% to revenue growth.

GAAP net income of $121 million increased 59%, resulting in GAAP earnings per share of $1.92. The increase was mainly driven by noncash goodwill and trade name impairment charges taken in the prior year that did not repeat, partially offset by higher acquisition costs and restructuring charges.

On an adjusted basis, net income of $155 million resulted in adjusted earnings per share of $2.45, an increase of 1%. We delivered that earnings growth in the face of a 3% foreign currency headwind and a higher adjusted effective tax rate. Our adjusted effective tax rate of 26.9% for the full year increased 100 basis points compared to the 25.9% in 2018, primarily due to the unfavorable geographic mix of pretax income.

Operating cash flow of $179 million was $69 million lower than the prior year, primarily due to expenses related to the acquisition of Milacron and an increase of $14 million in cash paid for taxes. Our free cash conversion rate was approximately 122% of net income for the year. We continue to leverage the Hillenbrand Operating Model to drive greater efficiency across the business.

With focused execution of working capital initiatives, we delivered working capital turns of approximately 9x for the year.

During the year, we also returned $53 million to shareholders in the form of quarterly dividends.

In terms of our capital allocation priorities, we said that our priorities are reinvesting in our business, both organically and inorganically to accelerate profitable growth. The Milacron acquisition is a key strategic investment in advancing our vision.

As we announced on October 11, we've completed the financing necessary to fund the transaction, which includes 2 term loan commitments totaling $725 million under our credit agreement and $375 million of a 4.5% senior notes due in September of 2026.

In addition to net proceeds from this offering and borrowings from the term loan, we intend to use our revolver to fund the transaction.

Our leverage remained low in the fourth quarter, finishing with a net debt-to-EBITDA of 0.75 turns, keeping us in a good position as we prepare to close the transaction.

As we have mentioned in the past, we expect our pro forma net leverage to be approximately 3.6x depending on the timing of the close.

We will then focus on aggressively paying down debt with goals to get below 2.75x within 12 months and retain our investment-grade credit rating.

We're confident in our ability to rapidly pay down debt and return to our targeted leverage. We have a good recurring revenue stream, which we expect to hold up well in all economic cycles.

Batesville is a noncyclical business with strong cash flow, and we have a good parts and service business, which accounts for about 1/3 of our Process Equipment Group revenue, which is fairly stable and very profitable. In addition, we continue to see strength in the backlog with big Coperion projects, which we expect to deliver over the next several quarters.

Finally, with our focus on working capital efficiency, the execution of synergies and deploying the Hillenbrand Operating Model, we have multiple levers available to support our progress. We feel good about our ability to generate cash going forward and meet our deleveraging targets.

Our long-term capital deployment strategy is not changing, but we are temporarily modifying our approach by curtailing share repurchases and M&A to prioritize improving our leverage ratio.

Once we are comfortably back within our target ratio, we will resume our focus on executing strategic investments and returning cash to shareholders through share repurchases. We expect to maintain a strong balance sheet and a liquidity profile that will continue to provide flexibility to execute our strategy.

In summary, our solid fourth quarter performance was as we had expected, and it capped off a successful year for Hillenbrand. Our focus is now on capitalizing on the momentum we've generated in large plastics projects and driving flawless execution on the Milacron integration to deliver the targeted synergies and overall business results.

As a reminder, we expect to generate annualized run rate cost synergies of approximately $50 million within 3 years following the Milacron close. The majority of anticipated savings will come from reducing public company costs, capturing direct and indirect spend opportunities and realizing operating efficiencies.

Work plans have been developed to deliver run rate synergies of approximately $20 million to $25 million in year 1. We are very confident in our ability to deliver on the committed cost synergies.

Furthermore, we believe there is additional opportunity as we leverage the Hillenbrand Operating Model throughout the operations as well as driving revenue synergies across the business by leveraging cross-selling opportunities of extruder and material handling equipment and utilizing our global footprint to further penetrate the aftermarket. We will work together after the close to better define plans to drive results in these areas.

I will now turn to our outlook for fiscal year 2020. At this time, we are providing guidance only on our current stand-alone business as we have not closed on Milacron. We will revisit our outlook for the combined company with the next quarter's results with the expectation that we will have completed the Milacron transaction by then.

Looking forward, we expect revenue growth in the Process Equipment Group of 2% to 4% at current exchange rates. We anticipate growth will continue to be driven by the plastics business, particularly the large systems projects that have fueled our significant order backlog.

In contrast, we expect continued pressure across the other industrial businesses. Batesville revenue is expected to be down 1% to 3%, which is consistent with the forecasted decline in annual burial volume. On a consolidated basis, we project revenue to grow 1% to 3%.

We are targeting adjusted EBITDA margin expansion of 50 to 70 basis points in the Process Equipment Group this year, driven by our global procurement initiative and restructuring actions.

We expect some offset from continued mix pressure with more large plastics projects and fewer proppant screening machines than last year.

As I mentioned earlier, we are forecasting Batesville EBITDA margins to be in the range of 20% to 21% for the year. Adjusted earnings per share for 2020 is projected to be $2.45 to $2.60. That adjusted EPS range reflects earnings growth of 3% at the midpoint. We recognize there is uncertainty around global trade and the macroeconomic outlook.

At the same time, we believe we are well positioned for continued growth and feel confident we can deliver results within the targeted range.

Cash generation remains a top priority, and our goal remains to deliver free cash flow greater than our net income. Our adjusted effective tax rate is forecasted to be approximately 27%.

As a reminder, we'll revisit our outlook for the combined company with the next quarter's results.

Finally, I'll comment briefly on timing. We expect earnings growth to be more heavily weighted to the back half of the fiscal year. We anticipate some incremental pressure to our first quarter based on the timing of large projects in the backlog and tough comps driven by higher margin separation equipment for proppants in last year's first quarter that will not repeat.

Also, keep in mind, Batesville's revenue is seasonal. The fiscal year second quarter is generally the largest, driven in part by the severity of the flu season.

In summary, we are confident we can build our positive momentum in fiscal 2019 and continue to drive profitable growth for Hillenbrand.

At this time, I will turn the call back to Joe.

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Joe A. Raver, Hillenbrand, Inc. - President, CEO & Director [5]

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Thanks, Kristina. As I mentioned earlier, we had a good finish to the year with solid fourth quarter's financial results, including record revenue and adjusted earnings per share. We're encouraged by the growth in large systems for their production of plastics as well as Batesville's performance in delivering healthy margins in the face of lower volume and higher input costs.

Our teams remain focused on executing our strategy as we begin the new fiscal year. With a strong order backlog and a robust project pipeline, we anticipate healthy organic growth in the Process Equipment Group.

We're also working hard to welcome Milacron to Hillenbrand. Together, we'll continue to take care of our customers and execute on our strategy and plans to deliver the full potential of the acquisition.

That concludes our prepared remarks. We're ready to take your questions. As a reminder, we will not be addressing questions regarding Milacron's quarterly performance.

With that, I'll ask the operator to please open the lines.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Matt Summerville of D.A. Davidson.

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Matt J. Summerville, D.A. Davidson & Co., Research Division - MD & Senior Analyst [2]

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A couple of questions. First, with respect to the 2% to 4% organic you're forecasting for PEG. Can you provide -- maybe parse that out a little bit in terms of what your expectation would be just with respect to the Coperion business between large projects, engineered plastics and parts and service? And then what the expectation is in aggregate for Rotex, Red Valve, ABEL, TerraSource, maybe the general industrial businesses, if you want to refer to them as that?

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Joe A. Raver, Hillenbrand, Inc. - President, CEO & Director [3]

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Yes. Thanks, Matt. I'll start, and then Kristina may weigh in. So we're expecting higher growth when we look at the Process Equipment Group in the larger projects, again, driven by Coperion's business in polyolefin systems. And so we see a good backlog there. We see a good pipeline of projects there and expect continued growth there.

From an engineering plastics perspective, we see modest growth in engineering plastics as we see -- we do see some pressure from kind of global demand and a slowdown. But we've also seen some nice projects in some end markets like PVC, polycarbonate, et cetera. So that's a modest growth rate.

And then from a parts and service perspective, we expect continued good parts and service growth. We saw a good parts and service growth this year, especially on a constant currency basis and expect that to continue as we head into fiscal 2020.

I'd say for the rest of the industrial businesses, it's pretty flattish kind of growth as we look year-over-year. We've got a little bit of pressure that we'll see in the first half around tough comps related to screening equipment used for proppants. And then we've just seen general softness in sort of industrial markets around the world.

So again, the strongest growth in PEG comes from the large projects. We do see a solid demand on the engineering plastics side as well, particularly given that we've balanced out some of those more cyclical down end markets with some other projects related to certain types of plastics, and then flattish growth for the rest of the business.

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Matt J. Summerville, D.A. Davidson & Co., Research Division - MD & Senior Analyst [4]

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And then with respect to the comment you made about the project activity, the funnel on the large side of things within Coperion, maybe a little bit more granularity there, the number of projects in the funnel as you headed into fiscal '20 versus maybe what you had on the drawing board heading into fiscal '18 and '19. Is there any sort of relative characterization or maybe numerical quantification you can put behind that?

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Joe A. Raver, Hillenbrand, Inc. - President, CEO & Director [5]

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Yes. So we don't really share the numerical quantification. But as you can imagine, these are publicly announced projects, the large projects, there are a handful of these. It's not like a long spreadsheet. It's a relatively short list of pretty large projects. And then I would say that the project pipeline is really -- it's very similar and comparable to what we've seen over the past couple of years. And again, the pipeline tends to be pretty focused around North America, where we continue to see growth related to the use of a shale gas, particularly for polyethylene. And then in Asia, where oil-based products are the feedstock, and that's typically a little bit more polypropylene oriented. And so we continue to see that same sort of mix of business and those geographies as the key places for those large projects.

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Operator [6]

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Your next question comes from Daniel Moore of CJS Securities.

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Daniel Joseph Moore, CJS Securities, Inc. - Director of Research [7]

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Well, let's start with -- Joe, you mentioned kind of 3 key platforms that you'll have pro forma once the deal with Milacron closes. Beyond just organic cash generation and the synergy capture, what opportunities do you have to potentially delever the business faster relative to some of those smaller, possibly noncore businesses in the portfolio?

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Joe A. Raver, Hillenbrand, Inc. - President, CEO & Director [8]

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Yes. So Dan, I think you're aware, we've -- for the last few years, we've talked about our strategy, which is to strengthen our current platforms and then to continue to build platforms. When we say platforms, we mean scaled businesses that have $500 million or more revenue, and we have scale in the marketplace with size, et cetera, but also -- or scale economically, but also scale in the marketplace where we're having a very good position in the industries that we serve. And so with the Milacron acquisition, we're excited because we think it fits sort of both of those strategic intents. And one is the Coperion business gets stronger, and I think, the Milacron businesses get stronger as they can cross-sell products and share technology, particularly around the extrusion business and material handling.

And then as I mentioned, I think, in the prepared remarks, we get 2 new sorts of sizable platforms in the MDCS business and the APPT business. So as we look forward and we think about capital allocation, of course, after we've paid down debt, we would expect to allocate more capital where we get the highest returns, and we would expect that to be in building out some of the larger scaled platforms that we have.

From some of the smaller businesses perspective, we constantly look at our portfolio, we sort of, I think, we say this every time on a call, we're constantly looking at the portfolio. We formally look at it twice a year, once with the full Board. And so we're always looking at that portfolio, and as we think about where we're going to allocate capital going forward and where we get the best returns if there is a better owner for one of those businesses or if we can create shareholder value with the divestiture of one of those businesses, I think, as we've said in the past, right, we would be open to that.

And then related to debt, of course, if something like that were to happen, a transaction would happen, we would certainly use the proceeds to pay down debt. I mean, that's our first priority in the coming 12 to 24 months.

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Daniel Joseph Moore, CJS Securities, Inc. - Director of Research [9]

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Very helpful. Maybe just shifting gears. You mentioned in the Process Equipment, specifically Coperion, you expect to win your share. It seems like you've been winning an outsized share over the last year or 2. Maybe just talk about some of the differences over the -- you alluded to some of the technologies, features. Do you feel like you're sort of distancing yourself in terms of those -- that you're -- the percentage of opportunities you're winning? Any commentary there would be helpful.

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Joe A. Raver, Hillenbrand, Inc. - President, CEO & Director [10]

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Yes. So we're a little hesitant to talk too much about share in this business because it's really a long-term business. You really have to look over a number of years given the size of the projects and how they're awarded. But we feel very good about some of the innovations that the Coperion business has undertaken. And they've really been focused, I think, around 2 places. One is to continue to increase throughput with our systems with smaller pieces of equipment, less energy costs. And so that's very beneficial to our customer base. And really, the demand for larger and larger projects continues in the marketplace, and that really plays to our strength.

I think, secondly, we're the only provider that can offer really the complete system where we have both the extrusion system and then all the material handling that goes around that. And there are certain benefits that we can offer to our customer around the size of their footprint, the ability to sort of make all those pieces of equipment work together to optimize their system, and we understand the entire system sort of one person to call when there's an issue and a comprehensive understanding of how to fine-tune those systems and make them more efficient and productive for our customers.

So a number of those kinds of things, we think, have positioned us really well for this trend of large projects, increasingly large projects around the world. And then we have a terrific global footprint, very strong in Europe, very strong in North America, and of course, significant in Asia as well. And so we feel like we have some real competitive advantages and feel good about our competitive position in the marketplace.

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Daniel Joseph Moore, CJS Securities, Inc. - Director of Research [11]

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Very helpful. And last for me, I'll jump back. But -- maybe for Kristina, but you alluded to the softness that Milacron is seeing here in the short term. Does any of that have any impact on your longer-term sort of fiscal '21 targets of getting to somewhere in the ballpark of $325 million in free cash flow?

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Kristina A. Cerniglia, Hillenbrand, Inc. - Senior VP & CFO [12]

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Yes. So I think our long-term thinking has not changed, Dan. So we still expect to get that $325 million of free cash flow by '21. We do close, hopefully, by the end of the year. And in the first quarter, we will be coming out with combined guidance. At that point, we'll also talk more about that $325 million. But right now, it's still the same long-term thinking that hasn't changed. It's -- this is a little blip. We knew what we were buying, and we will execute the synergies and expect to hit that $325 million in the next couple of years.

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Operator [13]

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(Operator Instructions) The next question comes from John Franzreb of Sidoti & Company.

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John Edward Franzreb, Sidoti & Company, LLC - Senior Equity Analyst [14]

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Just a little bit on the margin projections in process. Given the mix that you outlined, Joe, how do you achieve the 50 to 70 basis points in EBITDA margin given the pressure of lower-margin polyolefin businesses -- I mean, projects in the business mix?

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Joe A. Raver, Hillenbrand, Inc. - President, CEO & Director [15]

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Yes. So those gains come from a big driver, that is, we've put together a procurement initiative that we kicked off a couple of years ago. So that's the big driver of margin improvement for us as well as a number of other projects driving operational efficiencies in the business. And so those are longer-term projects. We have some visibility into those projects and into the backlog. And so we feel pretty good about the margin profile that we've outlined in guidance. But again, it's largely some of the cost actions that we've taken, efficiency gains and then the big driver of the efficiencies also is our global procurement organization.

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John Edward Franzreb, Sidoti & Company, LLC - Senior Equity Analyst [16]

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Okay. So it's not really volume dependent?

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Joe A. Raver, Hillenbrand, Inc. - President, CEO & Director [17]

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Well, volume is always an important piece of our margin profile. And we've built our supply chain to be more flexible to be able to flex up and down with different volumes. But certainly, volume is important, but a lot of those improvement projects, including procurement, they will happen independent of volume. And so we do, again, expect to get those gains as we move through the year on a percentage basis.

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John Edward Franzreb, Sidoti & Company, LLC - Senior Equity Analyst [18]

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Okay, got it. And similarly, in Batesville, you're projecting an EBITDA margin of 20% to 21%, that's down sequentially in a seasonally weak quarter. Can you talk a little bit how much of that is volume? How much of that is commodities? What's the competition you're assuming there for the Batesville margin erosion?

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Kristina A. Cerniglia, Hillenbrand, Inc. - Senior VP & CFO [19]

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So John, this is Kristina. When we think about Batesville going forward, we probably -- we aren't going to have a significant commodity inflation headwinds, but we are going to have noncommodity inflation, so typical wages and benefits that combined with lower volume, because remember, it's a high fixed cost business, and that's really why -- how we're getting the 20% to 21% EBITDA margin.

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John Edward Franzreb, Sidoti & Company, LLC - Senior Equity Analyst [20]

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Okay. And I guess one last question. I guess you mentioned the Milacron's savings is sticking to the $50 million. Does the weakness in Milacron, does that -- and I know you said $20 million to $25 million in year 1, does that enable you to realize those savings sooner? Or is it pushed further to the right of the 3-year horizon?

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Kristina A. Cerniglia, Hillenbrand, Inc. - Senior VP & CFO [21]

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No. So we still see achieving that $50 million within that 3-year time frame, that annual run rate. And when we think about the year 1 savings, the $20 million to $25 million of run rate savings at the end of year 1, remember, there's a lot of public company costs and direct and indirect procurement savings that are tied to that $20 million to $25 million. So regardless of the performance of the business, we still feel very confident that we're going to get that $20 million to $25 million run rate savings in year 1, and then the $50 million by year 3.

The other thing that I would highlight is there are other opportunities that we will be working on post close. So Joe alluded to revenue synergies that we'll be working on and then further operational synergies just deploying our Hillenbrand Operating Model.

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Operator [22]

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Your next question comes from Daniel Moore of CJS Securities.

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Daniel Joseph Moore, CJS Securities, Inc. - Director of Research [23]

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Just a little more granularity on the cadence of the guide. So Kristina, how much proppants revenue did you record in fiscal Q1 of last year? And how much revenue ballpark range would you expect in your fiscal '20 guidance overall?

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Kristina A. Cerniglia, Hillenbrand, Inc. - Senior VP & CFO [24]

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Yes. So proppants in last year first quarter was about $15 million. As we look at this quarter, we don't have any proppants capital revenue baked into our guide. For the full year, we had about $20 million of proppants revenue. So really, the proppants revenue is heavy in the first quarter and a little lighter in second quarter. And then really, that lapse in third and fourth quarter. And again, that's for capital equipment.

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Daniel Joseph Moore, CJS Securities, Inc. - Director of Research [25]

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And essentially little to none in near the full year '20 guide as well?

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Kristina A. Cerniglia, Hillenbrand, Inc. - Senior VP & CFO [26]

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Dan, we have no capital for proppants in the '20 guide.

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Daniel Joseph Moore, CJS Securities, Inc. - Director of Research [27]

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Got it. Very helpful. And then some housekeeping stuff. You said 27% tax rate, I think, I heard CapEx for next year of core Hillenbrand, what are we thinking right now?

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Kristina A. Cerniglia, Hillenbrand, Inc. - Senior VP & CFO [28]

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Roughly 2% of revenue.

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Daniel Joseph Moore, CJS Securities, Inc. - Director of Research [29]

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2% of revenue. Great. And lastly, Joe, you mentioned, obviously, this customary closing conditions, things that are out of your control, but if all fell -- everything fell as well as it could, the shareholder votes on the 20th, I mean, theoretically, could close by the end of the month. Is that correct?

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Joe A. Raver, Hillenbrand, Inc. - President, CEO & Director [30]

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Yes. So the shareholder vote is on the 20th, as I mentioned in my prepared remarks. Then the contract calls for -- if that's -- all the closing conditions are satisfied on the 20th, as an example, that means that, by contract, we'd close within 3 business days the longest. So if everything fell into place perfectly, you're looking at a pretty relatively fast time line. But again, I just want to stress that there's a number of things that have to fall into place and happen. We don't expect any issues, but I can't really predict what all those things are going to be and how it's going to play out, but that's the kind of time line that we'd expect at the shortest. And then I think, as Kristina mentioned, probably the longest is some towards -- somewhere towards the end of the quarter. So we expect it to happen during this quarter.

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Operator [31]

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

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Matt J. Summerville, D.A. Davidson & Co., Research Division - MD & Senior Analyst [32]

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Just a follow-up. I want to talk just a little bit about the plastics business for a moment. Is there a way to sort of frame up how much of your business is sort of potentially exposed to areas -- or Milacron's, for that matter, potentially exposed to areas where you sort of have this "war on plastics?" And then conversely, I want to flip it around and really try and dig into a little bit deeper, how your business could be leveraged to the recycling side of things and proposed European regulations around how much post-consumer content has to be included in products sort of going forward, so maybe work in some regulatory commentary as well?

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Joe A. Raver, Hillenbrand, Inc. - President, CEO & Director [33]

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Yes, sure. So a couple of comments. We -- what Coperion does is a large part of their business is in base resin plastics, so I think mostly polyethylene and polypropylene. And so we don't really know where all of that goes. And so we're kind of using general -- sort of general industry metrics or data for that. And so I would say, we're in probably about the 10% range or so. Again, there's a lot of assumptions there that would be attributed to single-use plastics. I think then we, of course, track where and what kinds of plastics are subject to some sort of regulatory ban or a regulatory issue, that's a much smaller part. Again, our estimates are less than 5%, 5% or less, that would be subject to some sort of regulatory ban around the world. So that's kind of how we think about -- and that's in the Process Equipment Group. So that's Process Equipment Group kind of metrics. So -- and I think Milacron is -- when you think about the Milacron business, again, we don't own the business yet and have a lot to learn. But they're not really sort of a bottle and bags kind of company. They're really a more durable plastics company, where they're focused in areas like consumer goods. So think furniture or coffee pots, automotive, medical, construction, profiles and frames. And so they're really not a big player in single-use plastics. So I don't know exactly what that looks like. But that, again, is probably somewhere similar to us in that 10%, maybe a little bit more range for single-use plastic and probably pretty similar in terms of where their actual legislative or policy bans or something in place. So I hope that helps answer your question.

And now -- and then recycling, yes, which -- so we've been very focused at the -- in the Coperion business on recycling. We do have good relationships with some of the larger systems providers for recycling in the industry. And as we look forward, we anticipate growth -- we've had growth, and we anticipate continued growth in recycling. As a matter of fact, we think that the parts of the Milacron product line may help us in our offering. But as recycling continues to catch hold as volumes of recycling increase, we think that plays to our favor as we're -- our strength is in sort of larger products and systems. And so a recycled product, is similar to a virgin product in the sense that it goes through an extruder, it comes out, it gets pelletized, it gets moved pneumatically. And so our equipment is used in recycling. And again, we're working to grow that part of our business actively and have been for the last -- in the last few years.

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Operator [34]

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Your next question comes from John Franzreb of Sidoti & Company.

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John Edward Franzreb, Sidoti & Company, LLC - Senior Equity Analyst [35]

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Yes. You had some pricing that you realized in both businesses in the fourth quarter. I was just wondering what your assumptions are? Your outlook is in pricing in the fiscal '20 guidance?

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Kristina A. Cerniglia, Hillenbrand, Inc. - Senior VP & CFO [36]

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So as we think about Batesville, price is usually offset with mix. So essentially, things flat. That's how we get down to our 1% to 3% decline in revenue for Batesville. When we think about the Process Equipment business, we've been doing pretty well in some of our Process Equipment Group, specifically around strategic pricing. And when we think about that, roughly 1% to 2% for PEG, specifically. Now going into a recession environment with the industrial businesses, we don't see that. So that's primarily at the Coperion business, where we're seeing this large -- the large projects, the volume.

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John Edward Franzreb, Sidoti & Company, LLC - Senior Equity Analyst [37]

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Great. Got it. And in regards to the other industrial business with "the nonplastics," the pumps, the valves and the screen. Joe, which businesses you're most concerned about in the outlook in the year ahead?

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Joe A. Raver, Hillenbrand, Inc. - President, CEO & Director [38]

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I think we have a crushing business, TerraSource. They're facing some industry headwinds. They continue to provide parts and capital equipment in the pulp and paper industry. And if anyone that follows that, they're at like a 10-year low for pulp and paper prices. And so we've seen a slowdown in capital equipment purchases as well as spare parts in that segment of the business, which is a relatively significant segment of the business.

And then also, we're historically in crushing for coal power companies, that's mostly spare parts, but we continue to see pressure on that as natural gas continues to displace coal across the country. So that's a business that really had some secular challenges and a little bit of cyclical challenge.

Now the flip side is, other markets may improve during the year. We play in the fertilizer markets in that business. We may see some rebound there in some other end markets. But that's probably the business that has the toughest industry headwinds right now in our portfolio.

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Operator [39]

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There are no further questions at this time. I will now return the call to our presenters.

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Joe A. Raver, Hillenbrand, Inc. - President, CEO & Director [40]

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Thank you, operator. And thank you, everyone, for joining our call. I will tell you, as a management team, we're very focused on running our businesses, very focused on preparing for the close of Milacron and the integration, achieving the synergies in the short run and the long run as well. And then really very focused on making sure that the integration we're prepared for day 1, it goes smoothly. And we have the teams well set to realize the full potential and the long-term value of the deal. We remain extremely excited about the deal and look forward to talking more about that in our next call, next quarter.

So thanks again for joining us today, and we look forward to speaking with everyone again in February as we talk about our first quarter results and the Milacron acquisition. Have a good day.

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Operator [41]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating, you may now disconnect.