Hillenbrand, Inc. (NYSE:HI) Q1 2024 Earnings Call Transcript
Hillenbrand, Inc. (NYSE:HI) Q1 2024 Earnings Call Transcript February 6, 2024
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Operator: Hello, and welcome to the Hillenbrand Q1 Fiscal Year 2024 Earnings Call. [Operator Instructions] A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Sam Mynsberge, Vice President, Investor Relations. Please go ahead, Sam.
Sam Mynsberge: Thank you, operator, and good morning, everyone. Welcome to Hillenbrand's Earnings Call for our First Quarter of Fiscal year 2024. I'm joined by our President and CEO, Kim Ryan; and our Senior Vice President and CFO, Bob VanHimbergen. I'd like to direct your attention to the supplemental slides posted on our IR website that will be referenced on today's call. Turning to slide 3. I 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, including organic comparisons for our segments, which exclude the impacts from acquisitions, divestitures and foreign currency exchange.
Also, we will be discussing our results on a continuing operations basis, which excludes the discontinued operations of Batesville, which we divested in February of last year. I encourage you to review the appendix in slide three of the presentation as well as our 10-Q, which can be found on our website for a deeper discussion of non-GAAP information, forward-looking statements and the risk factors that could impact our actual results. With that, I'll now turn the call over to Kim.
Kim Ryan: Thank you, Sam, and good morning, everyone. Thanks for joining us on today's call. Our first quarter performance reflects the dynamic environment we continue to experience in certain parts of our business. Total revenue growth of 18% and adjusted earnings per share of $0.69 were in line with our expectations, led by strong performance from our recent FPM acquisition and our continued success in driving aftermarket expansion. We saw sequential and year-over-year order improvement within our APS segment, with solid demand for our leading technologies and systems serving the plastics and food processing industries. However, we experienced weaker-than-expected performance in our MTS segment, with continued demand softness across most regions and end markets.
Additionally, our cash flow was lower-than-expected, due in part to softer orders within MTS and the continued push out of large project orders within APS and the corresponding customer advances, which contributed to our leverage being slightly higher than expected while exiting the quarter. We're not pleased with this current level of performance. So as we announced in our press release yesterday, we're responding by executing significant cost actions to optimize our MTS cost structure, including headcount reductions and footprint rationalization. We're confident these actions will not only strengthen our position within the current environment, but also ensure we're able to respond with higher levels of growth and profitability when demand recovers.
We expect these actions will deliver annual run rate cost savings of $15 million, with approximately 50% of that to be realized within the current fiscal year, which will help mitigate the demand headwinds within the MTS segment. Bob will discuss this further in a moment when he gives an update on our financial performance and outlook. I'll now provide a little more color on the end market dynamics we're seeing across both segments. Starting with MTS. As I mentioned, we continue to see a challenging demand environment in the quarter, with overall orders down both year-over-year and sequentially on the back of broad-based softness led by weakness in consumer goods and electronics. While we anticipated volumes to be down due to the lower starting backlog, performance came in below what we expected, particularly for orders and margin.
We did close a few larger projects in January, but we've yet to see a meaningful improvement in the overall trajectory of market demand, as customer investments remain pressured by elevated interest rates, low machine utilization, and uncertainty in consumer consumption patterns. We continue to focus on controllable factors inside the business as we navigate this difficult external environment, as evidenced by the meaningful cost actions we're taking. Now turning to APS, starting with durable plastics. We were pleased with the healthy order demand for our large extrusion and material handling systems in Asia and the Middle East, though the timing of customer decisions continues to be lumpy. While global macroeconomic factors are contributing factor to these delays, we've also seen the size of projects in both virgin plastics and recycling increased significantly, which in turn requires a longer relative quoting process.
However, we also believe this trend is a competitive advantage for us, as our equipment systems are optimal solutions for high output requirements. Lastly, as we expected coming into the year, we are starting to see improved lead times, both from our suppliers and as a result of HOM initiatives, which should allow us to convert our high backlog more efficiently going forward. Turning to food. We're excited to have FPM in the portfolio for a full quarter, as our teams remain energized as they execute integration plans and go to market as a leading global provider of food processing technologies and integrated solutions. The breadth of our geographic footprint and the technology offering enables us to be a world-class solutions provider across the applications we serve, including baked goods, pet foods, snacks and cereals and many more.
We continue to see solid order patterns and customer quote activity across most key applications, and we remain excited by the growing pipeline of opportunities we see as a result of our enhanced portfolio. Our integration activities, focused on both cost and commercial opportunities, continues to progress as expected. While we certainly face a dynamic and often challenging macro environment, I remain confident in our ability to execute our objectives through the remainder of the year, as we deploy the Hillenbrand operating model to drive synergy realization, productivity and working capital initiatives across the enterprise. With that, I'll now turn the call over to Bob to provide more details on financial performance and outlook.
Bob VanHimbergen: Thanks, Kim, and good morning, everyone. Turning to our consolidated performance on slide five. We delivered revenue of $773 million, an increase of 18% compared to the prior year, primarily due to the acquisition of FPM. On an organic basis, revenues decreased 7% year-over-year, primarily driven by lower volume in MTS, which we largely anticipated due to the lower starting backlog coming into the year. Adjusted EBITDA of $114 million increased 13%, but decreased 14% organically as lower volume and cost inflation more than offset favorable pricing, productivity and product mix. We delivered adjusted EBITDA margin of 14.8%, a decrease of 60 basis points over the prior year. We reported GAAP net income of $18 million, down from $25 million in the prior year, as the impact of the FPM acquisition was offset by lower organic volume, cost inflation, higher interest expense, a pension settlement charge and a higher effective tax rate.
Adjusted earnings per share of $0.69 decreased $0.01 or 1%. Our adjusted effective tax rate in the quarter was 28.6%, in line with expectations, but up 360 basis points compared to the prior year, primarily due to the nonrepeat of the China technology tax incentive we received in Q1 last year. Our cash flow from operations represented a use of $24 million in the quarter, which was $80 million unfavorable compared to the prior year, primarily due to lower earnings and the timing of working capital requirements. Capital expenditures were $12 million in the quarter, and we returned approximately $16 million to shareholders through our quarterly dividend. Historically, Q1 is a lower relative cash flow quarter for Hillenbrand, but cash performance was below our expectations this quarter, in part due to softer order performance.
However, we maintain our expectation that cash conversion will be approximately 90% for fiscal 2024, which includes the impacts of restructuring and integration-related cash benefits that we expect to realize in the year. Our longer-term goal remains at 100% free cash flow conversion. Now moving to segment performance, starting on slide six. Revenue of $568 million increased 38% compared to the prior year, primarily driven by FPM. Organic revenue modestly decreased by 2% year-over-year, as lower capital volume was partially offset by higher aftermarket parts and service revenue. While revenue came in slightly below our initial expectations, primarily due to timing of some larger orders, we still see healthy levels of demand to support our full year organic growth.
Adjusted EBITDA of $96 million increased 35% year-over-year, but decreased 3% organically, as lower volume and cost inflation more than offset favorable pricing, productivity and product mix. We delivered adjusted EBITDA margin in the quarter of 16.9%, which was down 40 basis points over the prior year, primarily due to cost inflation and the dilutive effect of the recent acquisitions. As we've communicated, we expect to improve the acquisition margins towards historical APS segment levels over the next few years, as we achieve synergies and deploy the Hillenbrand operating model to drive continuous improvement. Backlog of $1.9 billion increased 18% compared to the prior year, driven by FPM, but decreased 5% on an organic basis. Sequentially, backlog was up 3%.
Now turning to MTS on slide seven. Revenue of $205 million decreased 16% year-over-year, due to lower volume of injection molding and hot runner equipment. This was largely anticipated, given the lower starting backlog entering the year, but we did see weaker-than-expected performance from our hot runner product line at the end of the quarter. Adjusted EBITDA of $32 million decreased 26% due to lower volume and cost inflation. Adjusted EBITDA margin of 15.7% decreased 200 basis points compared to the prior year, largely driven by the impact of lower volumes, particularly within our higher-margin hot runner product line. As Kim highlighted, we're launching a restructuring program in our MTS segment in order to improve operational efficiency and optimize our cost structure for the current environment, while also ensuring we remain poised for growth once market conditions improve.
We expect to incur a restructuring charge related to these actions of approximately $20 million in the year, with annualized run rate savings of approximately $50 million by 2025. We're estimating approximately 50% of the run rate savings to be achieved in the current year, which I'll cover a bit more when I discuss our outlook for remainder of the year. Backlog of $232 million decreased 31% compared to the prior year, but was flat sequentially. While order volumes had been relatively flat throughout fiscal ‘23, we saw a further dip in injection molding orders in the quarter beyond what we had anticipated. As Kim mentioned, we did see a few large projects come through in January, but we do not yet believe this is necessarily a sign of broader improvement in the underlying market conditions.
Now turning to the balance sheet on slide eight. Net debt at the end of the first quarter was $1.8 billion, and the net debt to adjusted EBITDA ratio was 3.4 times. At quarter end, we have liquidity of approximately $650 million, including about $200 million in cash on hand and the remainder available under our revolving credit facility. Our ending leverage was up sequentially from 3.2 times, this was partially anticipated due to the regular seasonality of our cash flows. However, we did see additional unfavourability due to the lower-than-expected cash flow as well as an unfavorable impact at the end of the quarter from foreign currency exchange. Now moving to our capital deployment priorities on slide nine. Our capital deployment priorities are unchanged, as debt reduction remains our top priority.
Given the Q1 performance and uncertainty in the pattern of orders and working capital requirements, we now expect to return to our preferred net leverage range of 1.7 times to 2.7 times by Q2 of fiscal 2025, slightly delayed from our previous goal of Q1 2025. We are aggressively pursuing additional cost and cash synergies to accelerate our progress towards this time frame. I'll wrap up with our outlook for the remainder of 2024 in slide 10. We are maintaining our total company guidance range for the fiscal year, but expect to be towards the lower end due to weaker MTS performance, partially offset by approximately $8 million in restructuring savings expected to be realized in the year. As a reminder, our guidance ranges for total Hillenbrand are $3.28 billion to $3.44 billion for revenue, $530 million to $588 million for adjusted EBITDA and $3.60 to $3.95 for adjusted EPS, reflecting solid organic growth in our APS segment and significant inorganic contribution from the FPM acquisition.
For Q2, we are targeting to adjust our earnings per share in the range of $0.71 to $0.76, which is relatively consistent with the prior year, as the contribution of FPM and modest organic growth in EPS is largely offset by a significant decline in MTS, as the prior year was a record quarter for MTS. Please review slide 10 for additional guidance assumptions. In summary, as we look forward to the balance of the year, we continue to see a solid pipeline of demand in our APS segment, and we're confident the cost actions we're taking will help mitigate the market challenges within our MTS segment. With that, I'll turn the call back over to Kim.
Kim Ryan: Thanks, Bob. Before taking questions, I'll end our presentation this morning with a few final remarks. We remain laser-focused on deploying the Hillenbrand operating model to execute our integration and synergy plans, capitalize on innovation and other organic growth opportunities, improve our working capital metrics to drive cash flow and debt reduction and take the appropriate actions to protect our margins. As we navigate this dynamic macro environment, I'm all the more convinced in the strategic actions we've taken over the last two years in transforming Hillenbrand to leverage our technological capabilities by expanding into higher growth, less cyclical end markets that are supported by long-term secular growth trends.
We're well positioned for the future, as our teams are energized to serve our customers with world-class solutions as a global leader of highly engineered process technologies and systems, united by our purpose to shape what matters for tomorrow. We'll now open your line for questions.
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