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Edited Transcript of HI earnings conference call or presentation 1-Aug-19 12:00pm GMT

Q3 2019 Hillenbrand Inc Earnings Call

BATESVILLE Aug 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Hillenbrand Inc earnings conference call or presentation Thursday, August 1, 2019 at 12:00:00pm 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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* James Martin Clement

The Buckingham Research Group Incorporated - Analyst

* John Edward Franzreb

Sidoti & Company, LLC - Senior Equity Analyst

* Jonathan E. Tanwanteng

CJS Securities, Inc. - MD

* 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 Third Quarter of Fiscal 2019.

A replay of this call will be available until midnight Eastern Time, August 15, 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 of 6642849. This webcast will be archived on the company's website at ir.hillenbrand.com through August 30, 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, transcripts 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 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 Third 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 third quarter financial results, the outlook for our businesses and our recently announced acquisition of Milacron. We'll then open the call up for Q&A.

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 Slides 3 and 4 of the slide presentation and our 10-K and 10-Q, 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. For more information on our use of non-GAAP operating measures and the reconciliation to GAAP financial measures, please refer to our most recent 10-Q and the slides presented with this call.

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 value for our customers, great professional opportunities for our employees, improve the communities in which we operate and importantly provide superior returns for our shareholders.

About 3 weeks ago, we announced the acquisition of Milacron, a global leader in highly engineered and customized systems in plastics technology and processing with more than $1 billion in annual revenue. We're excited about this transaction and believe it's a pivotal next step in our journey to achieve our vision.

Milacron operates 3 business segments. The first is fluid technology. This is the CIMCOOL business, which produces synthetic and semisynthetic metalworking fluids. This is a relatively small business segment but has an attractive financial profile and a good niche position serving a variety of industrial customers.

Milacron's other 2 segments operate in the plastics processing industry, mainly injection molding and to a lesser extent extrusion. The Melt Delivery and Control Systems segment, or MDCS, is driven by the Mold-Masters business. Mold-Masters produces highly engineered hot runner systems and is a global leader in the industry. The company has a long history of revenue growth and an attractive high margin financial profile.

The industry is driven to a high degree by product life cycles, meaning that each time there is a new product introduction or product refresh, a new hot runner system is purchased that is uniquely configured to the new mold. This is a key characteristic of the hot runner market and one we believe makes this business so attractive.

The Advanced Plastics Processing Technologies segment, or APPT, best known through the Milacron brand, mainly produces injection molding equipment. Milacron is a leader in injection molding in North America and India. This segment also has a small extrusion business that primarily operates in North America.

The profile of these businesses is similar to our Process Equipment Group businesses, in that about 2/3 of their revenue comes from equipment sales and about 1/3 comes from aftermarket parts and services, where Milacron is the top supplier to its large installed equipment base.

Demand is driven primarily by capacity expansion and machine replacements for custom molders, auto suppliers and producers of consumer goods, electronics and medical products.

The business has undergone significant restructuring over the last several years, and we believe is well positioned to continue to expand margins and generate solid free cash flow, particularly with the application of the Hillenbrand Operating Model.

As I mentioned earlier, both MDCS and APPT serve the plastics processing industry. And I think it's important to note that Milacron's equipment tends to be more focused on durable products rather than single-use plastics. We expect demand to continue to grow over the long run in the industries Milacron serves, including consumer goods in construction where plastics improve durability, are lightweight, require little maintenance and reduce shipping costs; automotive is lightweighting becomes increasingly important with demand for more fuel-efficient and electric vehicles; and medical, with increased focus on safety, improved drug and therapy delivery and durability.

The acquisition of Milacron will extend Hillenbrand's reach across the plastics value chain from polyolefin production to compounding and engineering plastics to plastics processing, including injection molding and extruded products, to recycling.

We believe that over the long run, our deep expertise across all these process steps will foster innovation, help us serve our customers better and enable us to capitalize on emerging trends across the industry, including innovations in biodegradable plastics and recycling.

We expect the combined companies' increased scale and global footprint to strengthen our service network and drive aftermarket penetration, enable us to reap the benefits of improved procurement, leverage Milacron's shared services model to reduce costs and reduce public company costs.

We expect to generate $50 million in annual run rate cost savings within the first 3 years, with $20 million to $25 million of that coming in the first 12 months. For all the reasons outlined above, we believe this deal will create significant value for both Milacron and Hillenbrand shareholders.

Following the close of this deal, which we expect to complete in the first quarter of calendar year 2020, we'll be very focused on integrating Milacron. We're not planning to pursue any additional significant deals in the near term because we'll be very focused on achieving the full potential of our combined companies and paying down debt. We're excited about the acquisition, and we see it as a next step in Hillenbrand's vision to become a world-class global diversified industrial company.

Okay. With that, I'll now cover some of the highlights of Hillenbrand's third quarter results. Revenue of $447 million for the quarter was essentially flat year-over-year. Plastics remained the bright spot with continued revenue growth, particularly in large extrusion and material handling systems. That sustained strong performance helped us offset softer demand in a number of other industrial end markets.

Backlog decreased slightly from last quarter's record but remained at a healthy level of $940 million, a 20% increase over the prior year. Batesville's revenue was up in the quarter, as the market returned to more normal levels and a prior year upfront customer contract incentive did not repeat.

In total, we delivered third quarter earnings per share of $0.48 or $0.57 on an adjusted basis. That was in line with the prior year result, but was slightly below our expectations.

Turning to the Process Equipment Group. As I mentioned earlier, our plastics business performed well in the quarter and our outlook remains positive. As expected, order volume was more subdued in the third quarter compared to earlier in the year but remained at a very solid level. The pipeline of new polyolefin projects is strong and we've seen indications that customers are continuing to invest in capacity expansion, especially in North America and Asia.

In addition to the construction of new plants, we've seen plant capacities continue to rise. Customers have demanded more efficient equipment with higher output capabilities, which is something we believe our Coperion business can deliver better than anyone else.

We've developed innovative solutions to increase system output and reduce the total cost of ownership for our customers, making us the partner of choice for the largest most complex projects around the world. As the installed base of these large systems grows, we believe we have a significant opportunity to capitalize on the aftermarket business in the future.

In our experience, customers prefer to work with Coperion as the OEM when performing service or modernizing plants to ensure they maintain optimal system efficiency while minimizing the risk of costly downtime.

The engineered plastics business has generally remained healthy, but we're watching cautiously as we see mixed demand in key end markets. On the one hand, we continue to see softness in automotive, but on the other hand, end markets such as polycarbonate, ABS, PVC and recycling are active and growing.

We tend to see shorter investment cycles in engineered plastics as customers react more quickly to shifts in demand compared to the longer cycles we see in the polyolefin industry. All that said, our overall long-term outlook for engineered plastics remains positive.

We have a growing presence in food and pharmaceutical applications that has expanded modestly this fiscal year. Demand remained stable in these areas with an attractive long-term outlook. We continue to look for opportunities to increase our participation in these end markets through improved customer targeting, product innovation and over a longer-time horizon new product line additions.

Our other industrial businesses encountered more challenging market dynamics in the third quarter. As expected, separation business continued to face lower demand for proppants equipment. And in some cases, we've had customers delay capital orders we previously expected to ship this quarter. Additionally, lower proppants machine utilization resulted in weaker aftermarket sales for these customers in the quarter.

We continue to see some positives in areas like fertilizers, but overall market softness has led us to temper expectations for the separation business in the near term.

We faced similar challenges in flow control, where investment by North American municipalities has been lower than our expectations and demand from mining and industrial projects has been mixed.

In summary, while opportunities in plastics remained solid, especially for polyolefin projects, we're expecting continued weakness in other industrial end markets as we move through the fourth quarter. We continue to leverage the Hillenbrand Operating Model to drive productivity and cost-savings initiatives to help offset the effects of weaker demand.

Now let me comment on Batesville. Our strategy for the Batesville business is to build on its 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.

As you'll recall, a weak flu season contributed to a steep decline in burial volume in the second quarter. We expected volume to stabilize over the second half of the year, and that's how it has played out so far. As a result, Batesville performed in line with our expectations in terms of revenue and EBITDA margin in the third quarter.

We continue to employ the Hillenbrand Operating Model to help manage the business through a secular decline. We're constantly working to improve efficiency, reduce costs and operate a lean and flexible organization. Additionally, we're continuing to leverage Batesville's strong cash flow to fuel our investments for growth in our industrial businesses.

Now let me turn the call over to Kristina to review our third quarter financial results and outlook for the remainder of 2019. Kristina?

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

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Thanks, Joe, and good morning, everyone. We reported total revenue of $447 million in the third quarter, which was essentially flat year-over-year. Excluding FX, revenue was up 3%. Batesville revenue was up 2% year-over-year, while Process Equipment Group revenue was basically flat.

GAAP net income of $30 million or $0.48 per share was down $0.08 per share compared to last year, largely as a result of business acquisition costs and restructuring charges. The effective tax rate for the quarter was 26.8%, down 280 basis points year-over-year, largely as a result of the full implementation of the Tax Cuts and Jobs Act.

Adjusted net income of $36 million or $0.57 per share was in line with the prior year. The adjusted effective tax rate was 26.7%. Adjusted EBITDA of $70 million decreased 3% and adjusted EBITDA margin of 15.6% decreased 40 basis points primarily driven by cost inflation and unfavorable mix, which were partially offset by pricing and productivity improvements.

We generated $63 million of operating cash flow, about $32 million lower than last year's third quarter, primarily due to the timing of working capital requirements. We returned $13 million to our shareholders in the form of cash dividend. As a reminder, the timing of large capital projects can have a significant effect on cash, but we remain focused on improving efficiency through working capital initiatives to drive our cash conversion metric. Our goal remains to generate free cash flow that exceeds net income over the full fiscal year. And on a year-to-date basis, we finished the quarter with a conversion rate of nearly 100%.

Turning to the next slide. Let me cover segment performance beginning with the Process Equipment Group. The Process Equipment Group revenue of $315 million was essentially flat in comparison to the prior year. Excluding foreign currency headwinds, revenue grew 3%. We continued to see demand for plastics projects with revenue from large extrusion and material handling system for polyolefin production leading the way. That growth was offset by softness in capital equipment, serving other end markets primarily proppants where demand has moderated. Despite weakness in aftermarket sales related to these proppants machines, the overall parts and service business remained solid.

Adjusted EBITDA margin of 17.4% decreased 100 basis points due to cost inflation, mix and a one-time supplier quality issue, which were partially offset by strategic pricing and continued productivity improvements driven by strategic sourcing initiatives. Without the one-time supplier quality issue, adjusted EBITDA margin would have been flat for the quarter.

Consistent with our expectations, we had a higher proportion of large polyolefin systems projects, which carry a lower margin due to higher buyout content and higher margin separation equipment used in proppants production was down significantly compared to the prior year.

The large systems projects create some margin pressure over the short term. However, we expect the growing installed base of these systems will lead to new opportunities for highly profitable parts and service revenue in the future.

Order backlog of $940 million increased 20% over the prior year, although it was down 2% from last quarter's record level. A number of large systems projects are included in the backlog, the majority of which are scheduled to be delivered in fiscal year 2020.

As Joe said, we continue to see a healthy pipeline of projects related to investment in new capacity. We see this as a great opportunity to continue to build our growing install base of polyolefin production systems.

Moving to the Batesville business, performance was in line with our expectations for the quarter. Revenue of $131 million increased 2% compared to the prior year due to the impact of an upfront incentive for a customer contract renewal in the prior year that did not repeat. Excluding the contract incentive, revenue was flat despite lower demand.

Adjusted EBITDA margin of 19.3% was 50 basis points lower than the prior year, mainly driven by cost inflation, which was partially offset by productivity gains. During the quarter, we executed targeted restructuring actions and pricing actions to moderate the impact of continued cost inflation. We continue to expect Batesville to end the year at 21% EBITDA margin.

In terms of our capital allocation priorities, we've said that our main focus is reinvesting in our business, both organically and inorganically to accelerate profitable growth. The Milacron acquisition is a strategic investment in furthering our vision. Our leverage remained low in the third quarter finishing with a net debt-to-EBITDA of 0.9x, putting us in good position as we prepare to close the deal.

While our capital deployment strategy is not changing, we are temporarily modifying our approach and we'll be prioritizing deleveraging. Post close of the acquisition, we expect our pro forma net leverage to be approximately 3.6x EBITDA. We will seek to aggressively pay down debt to bring our net leverage ratio down to below 2.75x within 12 months post close.

We are committed to maintaining our investment-grade ratings, and we are confident in our ability to meaningfully reduce debt over the near term. We also plan to continue to pay our current per share dividend. And when we reach our targeted leverage ratio, we will resume our focus on executing strategic acquisitions 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, and we will remain disciplined in our capital allocation.

With that, I'll turn to our outlook for the remainder of fiscal 2019. We continue to forecast revenues to be within the existing ranges. As a reminder, we expect consolidated revenue growth of 1% to 3%. We've continued to face headwinds from FX and our guidance for consolidated revenue now includes a negative 3% impact from foreign currency translation. Our prior estimate was negative 2%. Due to slowing industrial end markets, we're forecasting Process Equipment Group revenue to grow at the lower end of our 3% to 5% range, including approximately 4% of FX pressure. Our prior estimate for FX pressure to the segment was 3%.

We now expect full year Process Equipment Group EBITDA margin to be relatively flat year-over-year compared to our previous estimate of a 30 to 60 basis point increase as a result of further mix pressure and lower volume.

We continue to project Batesville sales to be at the lower end of the range of 1% to 3% decrease for the full year, with adjusted EBITDA margins of approximately 21%.

In addition to slowing industrial end markets and continuing FX headwinds, we're expecting a higher tax rate. For these reasons, we are updating earnings guidance. Adjusted earnings per share for 2019 is now projected to be $2.40 to $2.46 compared to our prior estimate of $2.45 to $2.60. The adjusted EPS range reflects a negative foreign currency impact of approximately 3% and an adjusted effective tax rate of approximately 27% for the full year compared to our prior estimate of 26%.

In response to these external pressures, we have implemented discretionary spending reductions and targeted restructuring actions to offset the pressure to our near-term outlook. And as always, we're constantly leveraging the Hillenbrand Operating Model to make our businesses better and more efficient. At the same time, we remain focused on executing our long-term strategy.

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. Overall, our third quarter results were modestly below our expectations. This continued strength in plastics was offset by weakness in other industrial end markets. However, we're excited about the future of our company and the tremendous potential we see with the Milacron acquisition. We're focused on execution and leveraging the Hillenbrand Operating Model to drive operational efficiency and profitable growth. In addition, we're preparing for the integration of Milacron to ensure that we don't miss a beat with our customers and that we deliver on the full potential of the deal. I'm confident that our teams will finish the year strong while at the same time, laying the groundwork for 2020 as we continue to transform into a world-class global diversified industrial company in the eyes of our customers, our employees, our communities and our shareholders.

That concludes our prepared remarks. We're ready to take your questions. Operator, would you please open the lines?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Dan Moore from CJS Securities.

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Jonathan E. Tanwanteng, CJS Securities, Inc. - MD [2]

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This is Jon standing in for Dan. Could you start with the brighter spots and give us a little bit more color on the pipeline of projects in plastics and polyolefins that aren't already in backlog? And is that list growing? Or more steady over the past 1 to 2 quarters? And what geographies are you seeing the most significant interest in?

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

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Okay. Jon, I'll try to hit all of that. Make sure you ask again if I didn't get everything there. So I think the bright spot, plastics is the bright spot this year and in the quarter. So I think you got it right, we've seen continued growth in large plastics projects, and these are polyolefin projects. These are mostly centered in North America and Asia. And we continue to see a very solid pipeline of announced projects, both in terms of the number of projects and the value of those projects.

And then on the engineering plastics side, which -- these are smaller systems. So we're seeing a little bit of sort of a little mix in demand. So I think automotive and some slowing global economy is bringing demand down a bit on the one hand. On the other hand, we've seen really strong demand for projects related to polycarbonate and ABS, PVC, and we'll continue to grow in recycling. So net-net, it's a pretty stable market. It looks a little different than maybe we would have expected at the beginning of the year. But it's a stable market and it's -- and I looked at the quote pipeline this week. And so in terms of the number of projects out there and the value in our engineering plastics business, it remains pretty stable and, as an example, it's just slightly up this quarter sequentially. So we continue to see good demand on the plastics side of the business. And so that's probably the positive story for the quarter.

And then I think secondly, and I'm not sure if you wanted to go beyond plastics, but I think secondly, the Batesville performance in the quarter, the burial market was a real challenge in the second quarter with a light flu season and a tough year-over-year comparable, we saw the third quarter return more to normal demand in the market. But perhaps more importantly, Batesville performed well in that market. And so the Batesville business really was where we expected it to be and that was also another good story for this quarter.

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Jonathan E. Tanwanteng, CJS Securities, Inc. - MD [4]

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Okay. Great. And could you just comment on the mix at Batesville? Again, what was the impact of price versus volume this quarter?

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Kristina A. Cerniglia, Hillenbrand, Inc. - Senior VP & CFO [5]

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So essentially, our volume was up and what we call ASP was essentially flat.

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Joe A. Raver, Hillenbrand, Inc. - President, CEO & Director [6]

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Yes. I would just comment, we didn't see anything unusual in what was happening in Batesville on price mix and volume this quarter.

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Jonathan E. Tanwanteng, CJS Securities, Inc. - MD [7]

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Got it. And then finally, just looking at the Milacron deal and the way the market is digesting that. With some concerns about leverage and/or maybe exposure to China, your stock is now trading at around 7x pro forma free cash flow, including your expected synergies. Can you walk us through the sensitivity of that FCF goal for 2021? And in a typical recession, how much risk or downside is there to that number? And what levers can you pull to protect that? Because if you can hit those numbers, your stock seems pretty attractively valued here.

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

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So I think when we look at the forecast of the business, we believe that the cash flow prospects of the Milacron business are good. They've done a bunch of restructuring over the past few years that have impacted cash flow. And so as we look forward -- and we -- you can follow their stock and they had their earnings call this week, you can see sort of what's happening in their business. But as we look forward, we see good cash generation opportunities in that business as well as our own. And then the $50 million in synergies, again we walk through where that comes from. And a chunk of that is from redundant public company cost, which we've estimated to be $20 million to $25 million, so we can hit that run rate in the first 12 months or so. And then procurement opportunities both on the direct side and the indirect side, and then of course just operating efficiencies both with us using the Hillenbrand Operating Model, but also of us leveraging their shared services model. So we feel good about the ability for us to hit those numbers and to generate the cash flow.

I think the other piece of it when you think about our cash flow looking forward is we have the stable Batesville business, which is really a noncyclical business. It's driven by secular trends, and so stable cash flow there. A very solid backlog in the Coperion business, right over $900 million backlog and those projects tend to be big projects that don't really get canceled, at least that's the history. And then a good parts and service element to our revenue. So we have a really good recurring revenue stream, which holds up well in all economic cycles. So we feel good about our ability to generate cash going forward and meet our pay-down targets that we've stated publicly associated with the deal.

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Operator [9]

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

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Matt J. Summerville, D.A. Davidson & Co., Research Division - MD & Senior Analyst [10]

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A couple questions. Can you quantify the magnitude of the hit you took from the supplier quality issue that you described? And what exactly that issue may have been in the quarter and whether it's fully remedied at this point?

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Kristina A. Cerniglia, Hillenbrand, Inc. - Senior VP & CFO [11]

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Yes. Sure. So I had mentioned that without the supplier quality issue, our PEG EBITDA would have been flat. If you convert that to, say, pennies, it would have been about $0.03 or about $3 million. I would tell you that supplier issue has been rectified. It was a one-time item. And we do not expect it to repeat.

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Matt J. Summerville, D.A. Davidson & Co., Research Division - MD & Senior Analyst [12]

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And then with respect to the proppant side of the business, it sounds like some things maybe slipped to the right, is that permanent slippage? Is that cancellation? And then I guess maybe can you quantify what that impact may have been as well to you guys during the quarter?

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Kristina A. Cerniglia, Hillenbrand, Inc. - Senior VP & CFO [13]

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Okay. So from a proppants perspective, what we are seeing is some customers that have not taken some shipments that they were originally scheduled to take. The nice thing about that is that we have some significant cash down payments, so we don't know if they're going to cancel or not. What we are trying to do, obviously, is work with those customers to take those products. I would tell you kind of the proppants in total impact because, not only did we see the push of these capital equipment, but we also are seeing lower utilization in our spare parts. And that in total was worth roughly about $4 million in revenue. And so that flows through, you can assume, at roughly 50% or so because those capital equipment generally tend to carry higher margin than our PEG average margin equipment. And so it's hard to say whether or not it pushed permanently or temporarily, but we're working real hard to try and get those -- that equipment placed.

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Matt J. Summerville, D.A. Davidson & Co., Research Division - MD & Senior Analyst [14]

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With respect to PEG, just sticking with that, during the quarter, can you quantify what sort of organic growth you experienced in the Coperion business? And maybe how much on a year-over-year business that proppants area was down for you guys?

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Kristina A. Cerniglia, Hillenbrand, Inc. - Senior VP & CFO [15]

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So Coperion did experience organic growth of roughly high single digits and continues to have a significant positive outlook. I would tell you that they did have FX impact. So they were hit -- if you think about that business, it's primarily European-based. So we did see some FX impact to that business, but for the most part that business continues to grow. And it's really offsetting some of that slowness that we're seeing in some of our other industrial businesses.

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Matt J. Summerville, D.A. Davidson & Co., Research Division - MD & Senior Analyst [16]

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And then Kristina, how much proppants was down year-over-year?

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Kristina A. Cerniglia, Hillenbrand, Inc. - Senior VP & CFO [17]

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Proppants was down year-over-year, I want to say about $15 million in revenue.

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Joe A. Raver, Hillenbrand, Inc. - President, CEO & Director [18]

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And that includes -- most of that is capital -- the vast majority of that is capital, but, as Kristina mentioned, we also saw reduced utilization of spare parts, really consumable parts for -- in that market and that's also part of the margin challenges, that's high-margin business for us compared to the larger projects at Coperion. The upside to the larger projects at Coperion is that they generate lots of spare parts in the future which are profitable for us.

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Operator [19]

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Your next question comes from the line of Jamie Clement from Buckingham Research.

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James Martin Clement, The Buckingham Research Group Incorporated - Analyst [20]

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Joe, if I can start with you and then, Kristina, I'll ask you a follow-up. Joe, from your perspective of kind of the macro environment and how things played out in the June quarter, are there any similarities between kind of what you all are seeing now and what you guys saw, I guess, I don't know, about 4 years ago kind of 2015 into 2016, is there any similarities there?

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Joe A. Raver, Hillenbrand, Inc. - President, CEO & Director [21]

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I have to take myself back a little bit to that time, I think that was a pretty challenging -- we saw a number of challenging markets. So I think -- again, I'm going to have to kind of take myself back, but I believe we're in a down cycle on the proppants business at that point. And so that -- we love that business when it's up, but it's a challenge because it's a very sharp up and down in terms of its cyclicality. And so we're experiencing that. I would tell you that I think the one thing that is similar also related to that is the last cycle we had utilization remained pretty high of the equipment that was out there. So we saw continued consumable parts growth, which was good or at least steadiness. I think this downturn resembles more the '15 downturn, where it's both capital and we're seeing reduced utilization.

On the Batesville side, I think things are pretty stable from the Batesville perspective. And from a market perspective, it's a very predictable market. I don't recall to be honest with you where we were in the Coperion business in that time frame, but I believe it was a relatively flat period for us during those years. And so I think the difference today would be certainly on the large project side. I mean we are experiencing continued strength in large projects, and that's been going on for quite a while. So that part of it would probably be a bit different. That would probably be the one place that was -- that is different.

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James Martin Clement, The Buckingham Research Group Incorporated - Analyst [22]

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Okay. I really -- No, listen, I appreciate the color. That's very helpful. And Kristina, have you guys given thought when you report the September quarter, would you anticipate just guiding for the Hillenbrand businesses for fiscal 2020 and then rolling in Milacron to guidance when you close the deal? Or you're going to take a shot at guiding on the combined businesses? Or is it just way too early to tell yet?

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Kristina A. Cerniglia, Hillenbrand, Inc. - Senior VP & CFO [23]

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It's way too early to know yet. So we -- in September, we will guide on our business, and then we will update guidance when we close the deal.

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Operator [24]

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(Operator Instructions) Your next question comes from the line of John Franzreb from Sidoti.

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John Edward Franzreb, Sidoti & Company, LLC - Senior Equity Analyst [25]

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Joe, just a follow-up on that last thought. The backlog's relatively high, especially compared to the last time we had a downturn. Could you talk a little bit about the pricing of the jobs you're currently getting in backlog? Are they still favorable? Are they getting tougher? Can you sort of kind of put in context what the outlook looks like in process on a relative basis?

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Joe A. Raver, Hillenbrand, Inc. - President, CEO & Director [26]

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Sure. So we tend -- pricing tends to get a bit better when we have periods of relatively high demand. So I would say that our pricing is very solid in the backlog. The project, as you know -- a big chunk of that backlog, there were large projects, and they were out a number of quarters. And so we're seeing pretty good pricing in the market, really on (technical difficulty) but also in the engineering plastics space as well. There is capacity constraints all along the value chain. And so we've been -- I think we've been pretty successful in terms of passing on costs and pricing has been pretty solid. So we feel good about the backlog. The backlog is in good shape.

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John Edward Franzreb, Sidoti & Company, LLC - Senior Equity Analyst [27]

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Okay. So that's better than I expected. Great, great. And regarding the guidance for the balance for the year, I'm just wondering the proppants shipment delays, are they assumed to be coming into the fourth quarter? Or they're not included in the fourth quarter outlook?

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

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No, they are not included in the fourth quarter outlook.

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John Edward Franzreb, Sidoti & Company, LLC - Senior Equity Analyst [29]

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Okay. So they materialize on the upside. Got it. And if I understand what's going with Batesville proppant, it looks like you're looking for relatively flat revenue sequentially but maybe an improvement in the EBITDA margin. Is that the case? And if so, what's the drivers there?

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Kristina A. Cerniglia, Hillenbrand, Inc. - Senior VP & CFO [30]

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Yes. So there are a couple of things. This quarter, we had made some targeted reductions, restructuring, if you will, in that business. So we expect to see some of those savings come through. In addition, we had taken also targeted price actions. And so those 2 combined, we should see an uplift to the EBITDA margin for Batesville.

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John Edward Franzreb, Sidoti & Company, LLC - Senior Equity Analyst [31]

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Got it. Got it. And I guess one last question, Joe. You kind of threw in, in your prepared remarks that exposure to automotive sector. Could you just refresh my memory, what kind of exposure you have? And what you're seeing there. And maybe -- a little bit maybe on the margin profile, is this a profitable business for you, below-margin business for you? Just some color around that, that would be great.

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Joe A. Raver, Hillenbrand, Inc. - President, CEO & Director [32]

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Yes. Sure. So most of our exposure to automotive is -- as you know, we make the equipment that makes engineering plastics, and so it's that part of our business. So these tend to be compounding machines and systems that we sell. So it's a relatively big part of the overall engineering plastics market. And so it's a part of the driver of demand for our engineering plastics. And so we have seen -- as I mentioned, we've seen some softness in automotive, but that's been offset by strength in some other parts of the business, especially as it relates to polycarbonate, ABS, PVC, and then we continue to grow in the recycling space. And so while we see a little softness in automotive, we've seen pickup in other parts of our business to keep that engineering plastics part of our business pretty stable.

And then from a profitability perspective, there is really not a lot of difference between the profitability of those pieces of equipment. The one thing that would make a difference is kind of the size of the job, and so -- but there's no major margin difference between selling to customers who are making plastics that tend to go into automotive versus other end markets for our engineering plastics business. So quite frankly, that's kind of a bright spot -- it's a bright spot for us, right? Automotive has been somewhat weak, but we've not belted as much because we've been able to offset it in other parts in other end markets.

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Operator [33]

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And your last question comes from the line of Matt Summerville from D.A. Davidson.

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Matt J. Summerville, D.A. Davidson & Co., Research Division - MD & Senior Analyst [34]

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Just a follow-up, with respect to steel costs, they've obviously rolled over very significantly. How well can Hillenbrand protect that margin tailwind, that you should theoretically have in calendar 2020, particularly as it pertains to Batesville? And then maybe if you can also talk about kind of your input cost outlook looking into next year on the PEG side?

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Kristina A. Cerniglia, Hillenbrand, Inc. - Senior VP & CFO [35]

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Okay. So from a Batesville perspective, we buy our steel on contract. And so we currently have contract pricing that will take us through the first quarter of next year. And so essentially, what's happening is even with the steel price coming down, we still have these callers. So we're paying steel higher than market pricing at this point in time. Now that worked in our favor the past couple of years. When steel prices were going up, our prices did not go up as quickly. So we're seeing a lag in that steel pricing. So we expect next year when we renegotiate pricing, depending on where steel is, really hard to predict where steel is, hopefully, if it stays where it is, we should see some relief in that steel pricing. And then what was your other question, sorry, Matt?

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Matt J. Summerville, D.A. Davidson & Co., Research Division - MD & Senior Analyst [36]

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Well, I want to ask a follow-up on that -- to that point. If you look at the EBITDA margin in Batesville for fiscal '19, 21%, I mean, is what you said. How much input cost headwind are you encountering in that 21% margin in fiscal '19?

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Kristina A. Cerniglia, Hillenbrand, Inc. - Senior VP & CFO [37]

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So I think the way I'd answer that question is, as we look forward to the -- as we look forward to the next year, we are targeting to stay at that 21% EBITDA margin. And so as you can imagine, there are a lot of dynamics that go in that business. And so what we're targeting is to stay to that 21%. And so we don't anticipate in 2020 to be higher than that EBITDA margin, but obviously we will be coming out with additional guidance in September.

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Matt J. Summerville, D.A. Davidson & Co., Research Division - MD & Senior Analyst [38]

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Got it. And then the tail to my first question there was what's sort of the input cost outlook and the right way to think about how these lower steel prices may benefit the PEG side of the business as well.

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Joe A. Raver, Hillenbrand, Inc. - President, CEO & Director [39]

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So I think on the PEG side, a lot more of our business is -- we quote the job and then close the job. So when we quote the orders, we are able to reflect current pricing for all the input costs as we do the quotes. We also have the ability -- unlike the casket business where the pricing tends to be done once a year, we have the ability to update price books and take other actions to ensure that we're able to cover the commodity cost increases. And so if you think about this year, the past number of quarters when steel was going up, we had the ability to make sure we were capturing that for the most part on the margin side because again we quote each job individually or have the ability to adjust our price books pretty quickly. So I don't think it has a big impact. We don't expect it to have a big impact on margins as we go forward.

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Operator [40]

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There are no further questions at this time. I'll turn the call back over to Joe for closing remarks.

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Joe A. Raver, Hillenbrand, Inc. - President, CEO & Director [41]

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Thank you, operator, and I want to thank everyone for participating in the call today. We appreciate your interest in Hillenbrand, and we look forward to speaking to you again in November when we report our fourth quarter results. So have a great day, and enjoy the rest of the summer.

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Operator [42]

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