U.S. Markets closed

Edited Transcript of MCRN earnings conference call or presentation 30-Jul-19 12:00pm GMT

Q2 2019 Milacron Holdings Corp Earnings Call

Cincinnati Aug 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Milacron Holdings Corp earnings conference call or presentation Tuesday, July 30, 2019 at 12:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Andrew Kitzmiller

Milacron Holdings Corp. - Corporate Controller

* Bruce A. Chalmers

Milacron Holdings Corp. - CFO

* Thomas J. Goeke

Milacron Holdings Corp. - CEO, President & Director

================================================================================

Conference Call Participants

================================================================================

* Kenneth H. Newman

KeyBanc Capital Markets Inc., Research Division - Associate

* Michael Patrick Halloran

Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research & Senior Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Greetings, and welcome to the Milacron Holdings Corporation Fiscal 2019 Second Quarter Financial Results. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Andy Kitzmiller, Corporate Controller for Milacron. Thank you, Mr. Kitzmiller. You may begin.

--------------------------------------------------------------------------------

Andrew Kitzmiller, Milacron Holdings Corp. - Corporate Controller [2]

--------------------------------------------------------------------------------

Good morning, and thank you for joining us for our second quarter fiscal year 2019 earnings call. With me on today's call are Tom Goeke, and Bruce Chalmers. A copy of the earnings release that was distributed this morning can be found on our milacron.com website under the Investors section. We will also provide a link for the replay of this webcast. During our call today, we will be referring to the earnings release supplemental slides, which are also posted on our website. I would like to remind everyone that today's discussion will contain certain forward-looking statements based on the business environment as we currently see it and as such does include certain risks and uncertainties. Please refer to our press release and our SEC filings for more information on specific risk factors that could cause our actual results to differ materially from the projections described in today's discussion. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undergo no obligations to update these statements as a result of new information or future events. Also, we will discuss certain non-GAAP measures on today's call, including pro forma net sales and pro forma new orders. The pro forma figures included within today's presentation exclude certain product lines, which have been eliminated through restructuring plant closures or certain discontinued product lines. We believe the presentation on these non-GAAP financial measures enhance the understanding of our performance. Reconciliations to comparable GAAP financial measures can be found in our earnings press release and are also available as part of the presentation materials posted on our website.

Finally, consistent with our first quarter 2019 call, the reported results that we will discuss on today's call will be from continuing operations. As we moved our blow molding business to discontinued operations at the end of our first quarter 2019. And with that, I'll turn the call over to Tom Goeke, President and Chief Executive Officer of Milacron.

--------------------------------------------------------------------------------

Thomas J. Goeke, Milacron Holdings Corp. - CEO, President & Director [3]

--------------------------------------------------------------------------------

Thank you, Andy, and good morning. As Andy mentioned, we have a slide presentation on our website to accompany our earnings call, and it includes additional details to the commentary presented this morning.

Starting on Page 3. I'd like to walk everyone through the highlights of the previously announced merger with Hillenbrand. However, our discussion today will be limited to the details on this slide. We will not be taking any questions related to this transaction, and we refer everyone to the presentation made by Hillenbrand on Friday, July 12, 2019, as well as the related SEC filings by both companies. Our Board carefully and thoroughly reviewed the strategic and financial merits of this combination and unanimously concluded that this transaction represents a unique opportunity for Milacron, and provides our shareholders a significant and immediate value as well as the ability to participate in the upside potential of the combination. As part of the combination, Milacron shareholders will receive $11.80 in cash and a fixed exchange ratio of 0.1612 shares of Hillenbrand common stock for each share of Milacron common stock they own. In Hillenbrand, we believe we have found a tremendous partner. Our goal at Milacron has been always been to provide our customers with innovative products across our critical plastics and fluids technologies. Together with Hillenbrand, we will be able to continue delivering breakthrough products and customize systems to existing and new customers and strengthen our service platforms and distribution capabilities. Further, the Hillenbrand operating model is highly complementary to our approach, and we're confident we can seamlessly bring these 2 companies together. We are confident we can create even more value for our key stakeholders together in this exciting new chapter. I hope you share our enthusiasm about the many benefits we expect from this transaction.

Moving to Page 4. Our second quarter 2019 results are in line with our expectations with sequential improvements in net sales, adjusted EBITDA and adjusted EBITDA margin. The second quarter 2018 was a record quarter for Milacron, creating a tough year-over-year comp. As previously discussed, 2018 was best characterized as a tale of 2 halves, with very solid growth in the global economy during the first half of the year, and the introduction of policy generated headwinds in the second half that have carried into 2019. We are pleased with the sequential improvements during Q2 2019 and are optimistic that the second half of 2019 will be in line with our expectations. Regionally, orders in China in Q2 '19 increased in all 3 of our business segments, up 16% from Q1 '19 and up 9% from Q4 '18. We see strong activity in our Asia sales pipeline, and we're ready to meet customer demand as more projects are released. Within our MDCS segment, Mold-Masters saw increases in orders from Q1 '19 and Q4 '18 in nearly all of our end markets with increases in electronics, medical and packaging being the most significant. Additionally, our APPT backlog is $145 million with exceptional orders for our mid-tonnage products through the end of 2019. And we have strong activity in our sales pipeline for small-tonnage products as well in the aftermarket with retrofits and rebuilds. Both price and cost management were again very effective during Q2. Price continues to be stable year-over-year. Through SG&A, discretionary spend and direct labor reductions, we have offset inflation and had additional savings in the quarter.

I'll now turn the call over to Bruce for a detailed review of our financial performance.

--------------------------------------------------------------------------------

Bruce A. Chalmers, Milacron Holdings Corp. - CFO [4]

--------------------------------------------------------------------------------

Thank you, Tom, and good morning, everyone. I will walk you through our financial performance for the second quarter before turning the call back over to Tom for his closing remarks. I will start on Page 6 of the presentation. For the quarter, net sales were $271 million, 11% reported and 8% constant currency and pro forma decrease. On these sales, we generated 18.1% adjusted EBITDA margins for $49.1 million. Sequentially, net sales increased 9% and adjusted EBITDA margins improved 160 basis points. In net sales, geographically, we saw a very strong sequential improvement in both North America and China in the second quarter. From an end-market perspective, packaging, construction and medical, all did well in the quarter both versus prior year and sequentially. Automotive had mixed results throughout the company but, overall, was up 5% in constant currency over Q2 '18, and remained flat sequentially.

Now let me walk you through our 3 segments, beginning on Page 7 with MDCS. MDCS's second quarter sales were down 16% and 13% on a constant-currency basis, still primarily driven by China, which is down versus prior year, but up double digits sequentially. Automotive was strong both versus prior year and sequentially with electronics up over 50% sequentially and over 30% versus Q4 2018. MDCS generated adjusted EBITDA of $29 million in the quarter, a 28.3% margin.

Turning to our Fluid Technologies segment on Page 8. Fluid's second quarter sales were down 12% and 8% on a constant-currency basis primarily driven by timing of shipments in Europe due to raw material availability. Europe is carrying a $1.1 million backlog that will convert to shipments early in Q3. Despite these challenges, sales showed modest growth sequentially in North America and China. Fluids generated adjusted EBITDA of $6 million in the quarter, a 21.6% margin.

Lastly, our APPT segment results are on Page 9. Sales were $138 million in the second quarter. Constant currency revenue growth was negative 4%, but we had 1% sales growth on a pro forma basis. As a reminder, we shut down our European injection molding facility in Q4 2018, which had approximately $10 million of sales in Q2 of the prior year. Additionally, Milacron's management and Board of Directors have made the decision to divest blow molding business during Q1 of 2019, which has been classified as discontinued operations. North America continues to trend well with 30% sequential growth and 2% versus the prior year. Adjusted EBITDA was $20 million or 14.3% of sales in the quarter, a 110 basis point improvement over the prior year and a 100 basis point improvement year-to-date. The team is diligently marching towards the 15% full year margin goal for APPT.

I'd like now to discuss cash flow performance on Page 10. The second quarter, cash flow was $1.5 million and was a result of working capital timing and deal-related cost. As mentioned in our Q1 2019 earnings call, we had an $8 million cash used related to our purchase of a Mold-Masters production facility in Baden-Baden, Germany that we previously leased. Our intention is to resell and lease back this facility during Q3 2019. We closed on the sale of our blow molding business and collected approximately $52 million of proceeds on July 1, which were used to reduce the company's debt and further strengthen the balance sheet. With regard to our 2019 guidance, as a reminder, we based our 2019 annual guidance on the assumption that the policy-induced trade headwinds subside midyear and create a dynamic that is the opposite of FY '18, with some sequential weakness in the first half and a stronger second half. Thus far, we are tracking with these expectations and remain attentive to the inflection points underpinning our forecast for the remainder of the year. I'll now turn the call back over to Tom for his closing remarks.

--------------------------------------------------------------------------------

Thomas J. Goeke, Milacron Holdings Corp. - CEO, President & Director [5]

--------------------------------------------------------------------------------

Thank you, Bruce. As a wrap-up on Page 11, I would like to reiterate. Our Q2 results were consistent with our expectations and the first half of 2019 has progressed as anticipated. We had 9% sequential sales growth over Q1 2019. We had double-digit sales and order growth in China at the Milacron level and within our MDCS segment. We accomplished EBITDA margins of 18.1% with 100 basis point improvement in APPT year-over-year. The sale of blow molding closed on July 1, 2019, as anticipated and proceeds were used to pay down $52 million in debt on July 3. Through today's call, we have repaid $57 million of debt in 2019. We are on track to meet 2019 guidance.

Thank you for joining us for this call. And with that, we can now move to Q&A. As a reminder, we will only answer questions specific to our quarterly performance and financial outlook for 2019.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Your first question comes from Mike Halloran at Robert W. Baird & Co.

--------------------------------------------------------------------------------

Michael Patrick Halloran, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research & Senior Research Analyst [2]

--------------------------------------------------------------------------------

So the commentary certainly sent a positive on the call here which -- what it sounds like stabilizing trends sequentially consistent to what you were thinking? Now I put that in the context for the orders, which were down a fair amount, could you help reconcile those 2? And I'm guessing, part of it is just the moving pieces with some of the portfolio moves, but I'd certainly like to hear you reconcile those 2 data points?

--------------------------------------------------------------------------------

Thomas J. Goeke, Milacron Holdings Corp. - CEO, President & Director [3]

--------------------------------------------------------------------------------

Sure. Thanks, Mike. So largely the 2 issues that we see on the order side is timing within APPT both in India and in North America. The aftermarket is strong globally, sequential growth. Mold-Masters, all regions, all product lines in order. And then I would say in Fluids, where we have, let's say -- as Bruce mentioned, we had a bit of hold back because of material shortage, but on the flipside, I would say, other regions performing well, Europe a bit behind in Fluids. So largely on the order side, it's timing in APPT in North America and India. India is really a result of the elections, but we have super pipeline both in equipment and also in retrofits. So we feel good about the forecast forward and guidance, but we do see that's where it is in the figures.

--------------------------------------------------------------------------------

Michael Patrick Halloran, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research & Senior Research Analyst [4]

--------------------------------------------------------------------------------

And then just a little more context on China here. It sounds like the trend line is sequentially improving each over the last couple of quarters. Maybe just talk about, a little bit about what the environment feels like, what customers are saying to you and confidence of that sustainable?

--------------------------------------------------------------------------------

Thomas J. Goeke, Milacron Holdings Corp. - CEO, President & Director [5]

--------------------------------------------------------------------------------

Oh, it's definitely tough, right? We're slugging it out. I mean, part of it is winning new customers, part of it is new product development launch. And then, the balance is the current business. So what feels good about it is the team has really aligned to continue to pursue the orders that's been successful to date. Margins have stabilized and improved. So from all the input from the team, it feels really good. Like I said that we're chasing orders. It's -- I don't see it as a recovery, I see it as being in best position to win. But incrementally, it's a bit better.

--------------------------------------------------------------------------------

Michael Patrick Halloran, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research & Senior Research Analyst [6]

--------------------------------------------------------------------------------

Maybe last one from my side. Revenue is a little bit below what we were expecting but the margins were really healthy. Maybe just talk a little bit about some of the drivers that drove the strong margin performance here? And then a few comments on just sustainability from where we are today.

--------------------------------------------------------------------------------

Thomas J. Goeke, Milacron Holdings Corp. - CEO, President & Director [7]

--------------------------------------------------------------------------------

Sure. So on the top line, it was a bit of slip on customer side in APPT and North America on shipments and about -- I think it was $1 million to $2 million also in India same thing was because of payments schedule delayed until Q3. So no loss of orders, just a shove off into our Q3 and customer-driven. On the margin side, it feels really good and largely because of cost out, cost management and really doing a fair job of offsetting the tariff impact. So the team's done really well, that part is absolutely sustainable. And we've had very good margin recoveries and a little bit of the impact on margin comes from NPE in prior year and improve above.

--------------------------------------------------------------------------------

Michael Patrick Halloran, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research & Senior Research Analyst [8]

--------------------------------------------------------------------------------

It's good to see the progress. Congratulations on a solid quarter.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

Your next question comes from Ken Newman at KeyBanc Capital Markets.

--------------------------------------------------------------------------------

Kenneth H. Newman, KeyBanc Capital Markets Inc., Research Division - Associate [10]

--------------------------------------------------------------------------------

Just wanted to start off with free cash flow. And Bruce, I just wanted to clarify, it sounds like you are reiterating the 2019 guidance from last quarter. Free cash flow was a little bit weaker in the quarter than anticipated, but is it still right to model that $90 million to $100 million target?

--------------------------------------------------------------------------------

Bruce A. Chalmers, Milacron Holdings Corp. - CFO [11]

--------------------------------------------------------------------------------

Correct. We're on track. If you take a look at where we are, it's a little bit of a timing and working capital. But we're running at about 24% working capital as a percent of sales. We know we can get that back to 20% at the end of the year, it's just the timing of inventory -- flow of inventory build for shipments later in the year. So we're tracking well to hit that guidance and have no problem reiterating and reaffirming that number.

--------------------------------------------------------------------------------

Kenneth H. Newman, KeyBanc Capital Markets Inc., Research Division - Associate [12]

--------------------------------------------------------------------------------

Got it. And then as a follow to that, just trying to think about capacity, how you see manufacturing capacity for the company today? And the needs for going forward. Do you foresee any kind of large capital expenditure in the future to kind of help you grow into new capacity that you might need? Or do you feel that with all the uncertainty in the market today that you might have to hold off on any kind of growth expenditures?

--------------------------------------------------------------------------------

Thomas J. Goeke, Milacron Holdings Corp. - CEO, President & Director [13]

--------------------------------------------------------------------------------

Well, based on -- it's Tom. So coming out of '18 and, especially if you look back to the first half of the year that's sort of the capacity in the business, which is significantly different than sales in Q4 and -- I'm sorry, in Q1 and Q2. So just from a capacity point of view within the company, it's healthy. In terms of capital investment, where we focused presently and into this year will be in 2 areas, one is where we can invest in certain aged equipment to get productivities and, let's say, automation and then, on existing processes both in our Mold-Masters business and in machining in APPT. We're looking at automation and that really is advantageous since when we're -- at a period when we're in a very high-utilization time. We really can't even take the time to take equipment down even doing in the automation or to take aged equipment out to put automated equipment in. So we'll take advantage of some of that, which is, I would say, a modest investment, certainly not at the level of capital that we spent in prior year, so modest investment in '19 for, as I say, some updates and automation.

--------------------------------------------------------------------------------

Kenneth H. Newman, KeyBanc Capital Markets Inc., Research Division - Associate [14]

--------------------------------------------------------------------------------

That's helpful. One last one for me. It was helpful to hear some of the commentary on the orders through the quarter. I'm just curious, have the order inquiries been just strong or maintaining that trend throughout July? And just try to help us think about what you're expecting for order cadence since the back half, understanding that you're still expecting a stronger second half prior -- relative to the first half.

--------------------------------------------------------------------------------

Thomas J. Goeke, Milacron Holdings Corp. - CEO, President & Director [15]

--------------------------------------------------------------------------------

It's been pretty much consistent, and I would say that the pipeline is really solid, there's a couple of large orders sitting for us and that's not only in new equipment and Mold-Masters, but also, as I mentioned, in retrofit and rebuild. So the pipeline is solid.

--------------------------------------------------------------------------------

Operator [16]

--------------------------------------------------------------------------------

There are no further questions at this time. I would like to turn the floor back over to Tom Goeke for closing comments.

--------------------------------------------------------------------------------

Thomas J. Goeke, Milacron Holdings Corp. - CEO, President & Director [17]

--------------------------------------------------------------------------------

I'd like to thank all of you for joining Q2 call, and we look forward to catching up in the Q3. Thank you. Bye now.