Participants

Sam Mynsberge; VP of Investor Relations; Hillenbrand Inc

Kimberly Ryan-Dennis; President, Chief Executive Officer, Director; Hillenbrand Inc

Robert VanHimbergen; Chief Financial Officer, Senior Vice President; Hillenbrand Inc

Matt Summerville; Analyst; D.A. Davidson

Daniel Moore; Analyst; CJS Securities

Presentation

Operator

Greetings and welcome to Hillenbrand's Second Quarter Fiscal Year 2024 earnings call. This time, all participants are in listen-only mode and a question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star-zero from your telephone keypad. Please note this conference is being recorded. At this time, I'll turn the conference over to Sam Lindberg, Vice President of Investor Relations, Mr. Michael Rapino may now begin your presentation.

Sam Mynsberge

Thank you, operator. Good morning, everyone. Welcome to Hillenbrand's Earnings Call for our Second 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 we reference 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, excluding the impact from acquisitions, divestitures and foreign currency exchange rates.
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 and Slide 3 of the presentation as well as our 10-Q, which can be found on our website for a deeper discussion of non-GAAP information, forward-looking statements and the risk factors that could impact our actual results. With that, I'm going to turn the call over to Kim.

Kimberly Ryan-Dennis

Thank you, Sam, and good morning, everyone. Thanks for joining us on today's call. We continue to operate in a challenging demand environment as global macroeconomic uncertainty continues to impact customer order decisions across many parts of our business. We'll discuss this further in our updated outlook for the remainder of 2024, but first I'll give a little more color on the dynamics we're seeing in our segments and the actions we're taking in response to the volume headwinds we're facing.
Starting with the quarter, we had total revenue growth of 14%, driven by the acquisition of Schenck Process Food and Performance Materials business or FPM, and we delivered adjusted earnings per share of $0.76, which was in line with our expectations. However, while order rates improved sequentially in both segments, they did not rebound to the levels we expected coming into the year.
In our Advanced Process Solutions segment we continue to see strong aftermarket performance and solid demand from our polyolefin customers, where the investment cycle has remained resilient and our technological capabilities allowing for the highest output and quality gives us a strong competitive advantage.
However, this was offset by lower-than-expected orders for mid-sized capital projects in other end markets. Order pipelines remain robust and utilization of our test facilities remains high. However, final customer decisions continue to be slower than expected, which is negatively impacting the segment's top line for the year. In response, we began implementing cost actions during the quarter, including targeted restructuring and strict limitations on hiring, travel and other discretionary costs.
I'm pleased with the urgency in which the teams have been implementing these actions, which continue to contribute to the 100 basis points of adjusted EBITDA margin expansion that we saw in the quarter. While we anticipate some of these costs will come back, we'll be disciplined until we see orders returning to expected levels.
Additionally, we continue to make good progress leveraging the Hillenbrand operating model to integrate FPM and Linxis, and we're pleased with the traction that we're getting on margin expansion in these businesses, which is tracking ahead of schedule. We have seen a few larger projects get delayed to later in the fiscal year or early fiscal 2025, which put some pressure on near-term volumes. Nevertheless, we remain highly confident in the opportunities we see for these businesses to drive long-term growth and value for Hillenbrand.
Turning to our Molding Technology segment, we're pleased to see orders improve over 10% sequentially, but we've yet to see a clear inflection point in the demand environment as orders in the quarter were relatively consistent with what we experienced throughout last year.
We remain cautiously optimistic that we've hit the trough, but do not expect a material recovery in fiscal 2024, which is reflected in our updated guidance that Bob will cover in more detail later in the call. Additionally, we continue to see pressure in our short-cycle, high-margin hot runner products causing mix to be a headwind to our previously expected margin profile.
As we announced last quarter, we've launched a restructuring program for the MTS segment. We've been working diligently on the execution of this program and increased its scope to include an additional facility consolidations, which we executed in March. This is reflected in the $25 million charge we took this quarter, which was higher than the $20 million charge we had previously announced.
We also expect an increase in the annual run rate savings associated with the program to be approximately $20 million, up from our previous estimate of $15 million. We believe these actions are appropriate and necessary given the prolonged demand softness, and we're confident that we'll be well positioned to return to higher levels of growth and profitability once demand recovers.
Since completing the strategic acquisitions that enabled our transformation, debt reduction has been our #1 priority in terms of capital allocation. Sustained order delays have continued to negatively impact our cash flow and put pressure on our deleveraging time line in the near term, but our priorities have not changed. We're confident that ongoing working capital optimization initiatives, together with the implemented cost controls, will drive stronger back half performance as we move forward.
Across the enterprise, we charge ourselves and our global teams to take the necessary actions to position the business for success. We remain energized by our portfolio transformation and believe the secular trends that underpin our key end markets will perform as anticipated over the long term, and that our enhanced technological capabilities, engineering expertise and global reach will allow us to drive differentiated performance in these markets.
With that, I'll now turn the call over to Bob to provide more detail on our financial performance and outlook.

Robert VanHimbergen

Thanks, Kim, and good morning, everyone. Turning to our consolidated performance on Slide 5. We delivered revenue of $785 million, an increase of 14% compared to the prior year due to the acquisition of FPM. On an organic basis, revenues decreased 5% year-over-year as higher aftermarket revenue and pricing were more than offset by lower capital equipment volume, led by a decrease in MTS. .
Adjusted EBITDA of $123 million increased 13%, but decreased 7% organically, as pricing, cost containment actions, and product mix were more than offset by cost inflation and lower MTS volume. We delivered consolidated adjusted EBITDA margin of 15.6%, which was essentially flat to the prior year.
We reported GAAP net income of $6 million or $0.09 per share, down $0.24 from the prior year, as the impact of the FPM acquisition, lower tax expense, pricing and cost containment were more than offset by an increase in restructuring cost inflation, lower organic volume and higher interest expense.
Adjusted earnings per share of $0.76 increased $0.02 or 3%. Our adjusted effective tax rate in the quarter was 28.1%, which was in line with our expectations. Our cash flow from operations was $3 million in the quarter, down approximately $47 million from the prior year and below our expectations, primarily due to the timing of working capital requirements on large projects and lower customer advances.
We continue to deploy the Hillenbrand operating model to drive working capital efficiency around trade receivables, payables and inventory, where we saw an improvement as a percentage of sales of over 350 basis points year-over-year as well as sequential improvement. However, as a result of lower volumes and lower customer advances, we now expect our free cash flow for the full year to be in the range of $130 million to $150 million, versus our previous expectation of roughly $230 million.
Now moving to segment performance, starting on APS on Slide 6. Revenue of $559 million increased 30% compared to the prior year, driven by FPM. Organic revenue was flat year-over-year as higher aftermarket volume and pricing were offset by lower capital equipment volume, particularly in midsized systems.
Adjusted EBITDA of $101 million increased 38% year-over-year and was up 7% organically, primarily driven by favorable price cost and cost containment, partially offset by lower capital equipment volume. We delivered adjusted EBITDA margin in the quarter of 18%, which was up 100 basis points over the prior year, primarily due to cost containment, favorable product mix, and progress on integration initiatives. Backlog of $1.9 billion increased 12% compared to the prior year, driven by FPM.
On an organic basis, backlog decreased 5%. Sequentially, backlog was down 2%, but was flat excluding foreign exchange. Now turning to MTS on Slide 7. Revenue of $226 million decreased 13% year-over-year, primarily driven by lower volume for injection molding equipment. While injection molding faced a tough comparable against the prior year, the revenue performance exceeded our expectations for the quarter as the teams did a good job accelerating project execution from backlog, but this was largely offset by softer-than-expected performance in our hot runner product line, largely due to softer demand in North America.
Adjusted EBITDA of $34 million decreased 29% due to lower volume and cost inflation, partially offset by cost containment. Adjusted EBITDA margin of 14.9%, decreased 330 basis points compared to the prior year, largely driven by the impact of lower volumes on operating leverage and price cost pressure. In addition, we've identified isolated operating efficiencies in 1 of our hot runner facilities in North America. We've aggressively pursued cost actions during the quarter to help support back half profitability given these challenges.
Backlog of $230 million decreased 22% compared to the prior year, but was essentially flat on a sequential basis. As Kim mentioned, orders improved sequentially but do not fully recover the shortfall we experienced in Q1. We saw bright spots of demand for injection molding equipment, particularly for automotive and packaging applications, but weakness in consumer goods and electronics weighed on our higher-margin hot runner product line, particularly in North America, as I mentioned.
Turning to Slide 8. Net debt at the end of the second quarter was $1.88 billion, and net debt to adjusted EBITDA ratio was 3.5x. As net debt reduction remains our #1 priority, we're disappointed with the modest increase in our leverage, which was slightly above our expectations due to the weaker cash flow and orders. Given these conditions, it will be a challenge to achieve our deleverage target of returning to within our net leverage guardrails of 1.7x to 2.7x by our previously stated goal of second quarter fiscal 2025.
We'll continue to aggressively pursue cost actions and working capital efficiencies, but further reduce leverage, but we'll have to revisit the time line for turning to our guardrails once we have more visibility to order patterns normalizing.
I'll now wrap up with our revised outlook for the remainder of 2024. As mentioned, order patterns in the quarter remained below our original expectations. We've yet to see material shift in underlying market conditions. And consequently, we are updating our outlook to reflect current demand trends.
For full year 2024, we now expect total revenue for Hillenbrand of $3.2 billion to $3.3 billion, previously $3.3 billion to $3.4 billion. Adjusted EBITDA is now expected to be in the range of $512 million to $536 million, previously $530 million to $588 million. Adjusted EPS is now expected to be $3.30 to $3.50, previously $3.60 to $3.95. For EPS, the changes reflect lower volumes due to order timing and the impact of fixed cost leverage, partially offset by cost actions and accelerated margin performance within the recent acquisitions.
In MTS, we're seeing unfavorable product mix, pricing pressure and isolated operating inefficiencies within our hot runner product line, partially offset by roughly $8 million of in-year MTS restructuring benefits. We're seeing better performance in our injection molding product line compared to our original expectations, given some larger orders that came through in Q2, but as a reminder, this comes in at a lower relative margin.
Our higher-margin hot runner product line remains softer than expected, particularly in North America. And as I mentioned, we're experiencing operating inefficiencies in 1 of our hot running facilities, which is putting additional pressure on margins. Through our restructuring and capacity optimization efforts, we're actively working to return to expected levels of efficiency, which we expect to start seeing in the fourth quarter. For Q3, we are targeting adjusted earnings per share in the range of $0.80 to $0.85, reflecting moderately improved performance in both segments on a sequential basis.
Please review Slide 9 for additional guidance assumptions. In summary, we recognize the headwinds we're facing, and we're taking actions to enable the business to navigate this challenging environment. We will remain vigilant and pursue additional actions as necessary. At the same time, we remain excited about the opportunities for growth and margin expansion we see for the businesses over the long term.
With that, I'll turn the call back over to Kim.

Kimberly Ryan-Dennis

Thanks, Rob. Before taking questions, I'll end our presentation this morning with a few final remarks. We acknowledge that orders continue to be softer and more cyclical throughout various parts of our business as headwinds have persisted beyond our initial expectations. As Bob discussed, our revised guidance range reflects the current market conditions and the expected trajectory of the businesses throughout the rest of the year. I have strong conviction that our internal initiatives and diligent execution will navigate us through the near term and that our strong brands and process technologies remain best-in-class in their ability to solve our customers most complex processing needs anywhere in the world.
Finally, as we announced a few weeks ago, we'll be featuring a number of our brands at next week's plastics trade show, NPE, in Orlando, Florida. As 1 of the largest plastics trade shows in the world, this is a great opportunity for us to engage with customers and highlight the breadth of our capabilities and key innovations in supporting the critical elements of the plastics value chain, from pellet production to manufactured products to recycling. We'll be a leading member of the education sessions featuring industry experts within our business as well as hosting the annual circular plastics challenge again this year in partnership with Net Impact and Coca-Cola, where teams from all around the world come together to promote innovation within the plastics industry focused on sustainability and the circular economy.
With that, we'll now open the line for your questions.

Question and Answer Session

Operator

(Operator Instructions) Matt Summerville, D.A. Davidson.

Matt Summerville

Please just use your quest and just maybe you mentioned, can you talk a little bit about the quarter on quarter sequential order improvement you've seen across both segments, what markets and geographies are driving that? And what you've seen thus far in April, does that indicate at least some level of sustainability?

Kimberly Ryan-Dennis

So the so the orders?
Well, first of all, good morning that Bob and I are both kind of M&A does question a bit. And so on the APS side, we saw some orders.
We saw orders in those larger projects.
And so while those were some of the things we were waiting on, we did start seeing some of those break in the last quarter. And what I would say to that is that we were pleased with kind of obtaining more than what I would say is our fair share of those order decisions as they as they came to pass. So we were pleased with that. There are still, as you know, there is still robust order pipeline on those large projects that is anticipated to come over the next several quarters.
The place where we have continued to see some of the some of the delays in decision making is kind of those midsized projects, whether that's on compounding lines or whether that is some of the larger food lines that we've been bidding on, some of those or even some of the ones that we are going to market with as a for instance, it's a consolidated portfolio in our systems offering for the first time as we're building our pipeline for that.
So that's those are some of the places where we've seen a little bit of slowness that quick cycle business like the like the service business has continued to see great performance, good strength kind of on a global basis across all of the brands. And we have recently announced that the service organization is a part of the new food acquisitions also going to become a part of the service organization of APS.
And so we're really looking forward to the traction that we'll gain there, having them be a part of the entire service structure of the business so that we can begin to focus our efforts there on the expansion that we've talked about from a synergy standpoint.
On the MTR side, what we saw was a bit of recovery specifically in North America in the automotive area and the injection molding. And so we were pleased to see that. That's that has been they have been in in a period over the last six or so quarters where they've been they've been at this low. This is their this is their highest order intake on the injection molding side of the business in seven quarters so we were pleased with that.
And hopefully we've seen the we've seen the trough and are starting to come out of that a bit.
On the hot runner side, we continue to see some softness. And that is primarily, you know, that is a China and North America market for us. Primarily we have footprints in India. We have we service the European geographies. Those are the largest part of the market, though. So our market is kind of dictated by the hot runner space is dictated by primarily the China market and the and the U.S. market.
We have a we have a decently sized footprint in consumer goods, which is not an area that has recovered yet on the hot runner side. So continue to we continue to monitor that on the hot runner side. But again, on the injection molding side, we we've seen some nice pickup in some of the markets that are relevant for us and anticipate at least as we talk to our businesses, the outlook, the outlook continues to be, I would say, optimistic in those areas as they begin to see some uptick from anything else that I now hand, I think you covered everything.

Matt Summerville

So is there a model I know you mentioned?

Kimberly Ryan-Dennis

Yes. Yes.

Matt Summerville

No, absolutely. Thank you, Ken. With respect to the commentary regarding the incremental price pressure you've seen in Mt. I'm curious if you've gone back and realizing you acquired this in late calendar 19, so I understand that. But as you've gone back and I'm sure studied past cycles, is that typical customer behavior in the latter stages of a downturn in that business? And then if you could also maybe delineate a little bit the takedown you had in the MTS EBITDA margin guide. Can you maybe parse that out a little bit between how much of that is adverse moves in price cost versus the inefficiency issues that I believe Bob touched on bucket 30 or so?

Robert VanHimbergen

You know, Matt, on your first question, you know, it is typical, you know, when there is a downturn that there's this pricing pressure a little bit different now versus the last cycle, just because China is growing at the levels that was, call it six or seven years ago, but it is typical that to have pricing pressure during these to these cycles of.
And as far as the margins, you know, what is really the pricing pressure is probably call it. Pricing is probably a third of the margin decline, unfavorable mix from what we thought is probably a third as well. And then the on the manufacturing inefficiencies, probably a third again, the restructuring we expect to clean that up, and so we'll get out of that in Q4, as I mentioned.

Operator

(Operator Instructions) Daniel Moore, CJS Securities.

Daniel Moore

Please save your correct Thank you, Kevin.
Bob, appreciate the color and taking questions. And forgive me if this is a rehash of Matt's first question, to some extent, just looking at the midsize equipment projects in APS, and it sounds like you're seeing delays. Are you seeing any order cancellations at this stage? What are you hearing from your customers in terms of what they need to turn the in we get back on this at lower interest rates, is that geopolitical stability? Like what does it?

Kimberly Ryan-Dennis

Yes.
And so and so we are so what we're hearing on those midsized projects.
One of the things that I think is going to be exciting around this is that we those those midsized projects typically follow. They typically follow where we've had large pellet projects. So as capacity is coming online, that capacity has to go somewhere.
And typically, these midsize projects are compounding lines and things like that. Now in certain geographies, there are, you know, China as an example, which has been a large investment area for us. We didn't know if that wasn't a big compounding footprint for us historically.
However, what we are seeing that is encouraging from our point of view is that as these formulations and the requirements for these products, the output requirements are increasing, the quality requirements are increasing and that moves towards what we do.
And so some of the you know, there are some opportunities that we see in these markets where we've been putting a lot of capital investments in on the large projects where we think a lot of these of these relationships will continue to foster themselves into new opportunities for us to get into that mid-size project space because of the increasing complexity of demand.
And so that is that's kind of an exciting opportunity for us from that point of view, I would I would say that we feel we feel pretty pretty bullish about some of the opportunities that will be coming down the road of what expectations are there. But, you know, I think we have to continue to see a leveling out in consumer demand.
I think we have to continue to make sure that these plants are coming online.The plans we've been working on for a number of years now in certain geographies as those come on online and the investments for the next step of the process will break free and come online.
Remember the cycle times for those jobs are significantly shorter than the call it four years that you might see for one of those large really large project investments between the time that the projects conceived in the time that the plant is commissioned. So that's kind of what we're looking at. And in the meantime, we're continuing to build our service business with our large implementations and continue to focus on that on a global basis.

Robert VanHimbergen

So Dan, just to do specific to your question. Yes, we've had no cancellations on orders and no cancellations in our pipelines. Our pipelines are built on active discussions and those continue to grow. And I think interest rates certainly is a factor. And as those start to maybe decline, I think we'll get some of these unlocked.

Daniel Moore

That's helpful. Appreciate it. Any just more color on the incremental restructuring efforts, where specifically the cost saves are coming from? And how do we think about kind of incremental margins when volume investment eventually starts to recover? Is there kind of a short or medium term benefit in terms of the incrementals following the mean not just the incremental $5 million, but the overall restructuring program?

Robert VanHimbergen

Yes. So so we did announce obviously, on our in our last quarter call, we expected to take a charge of about $20 million in Q2. We did bring that up a bit to about $25 million. And then we then therefore increased our savings expectations from $15 million to now $29 million. That's going to be about $8 million of benefit coming in 2024 with full expected run rate to come in 2025.
As far as EPS, you did see in our prepared remarks, we are taking some smaller targeted charges, particularly in North America, and that's really just to adjust for some of the near-term order pressure on some of those product lines that we highlight some of the small and mid term projects.

Kimberly Ryan-Dennis

And one one thing, Dan, this is and I know we've talked about this before, but I'll just add kind of embrace that again, remember, when we started expanding six significantly, but the and the order levels in APS., we began to develop a partner.
So we have a certain amount of that capacity that we execute inside and a certain amount of that capacity that we have developed partners outside the business. So if you look at the nearly doubling of that business over the last five or six years, the number the footprint of employees have not doubled in response to that.
And what that does is it gives us a certain ability to flex and when demand goes up or down and what you've seen over the last quarter, the last couple of quarters, we were flexing down and we're able to do that without a lot of incremental cost, and then we will be able to flex back up as orders come in. So for instance, we saw a number of orders come in in those large projects.
So now we're back at a point where we need that flex capacity that for instance, we had taken offline over the couple of quarters before that, but that that took us a number of years to develop. And so I'll give a lot of credit to our part of his team on the companion side at anticipating this and developing those partners.
Over a number of years. It's a it's a muscle that we have that we're working to build all over the company. But it's been it's been a great tool for us now. And so we're using that right now as we're trying to get these new projects that have been signed in the last quarter, up and running again.

Robert VanHimbergen

And while we've still got pieces of the business that are kind of waiting on a bit of the order pipeline flow through and because of that flexibility down to your question, incrementals in APS, you know that's generally in that 35% to 40% range. And because of that Flex, that's how we're able to maintain that flow through.

Daniel Moore

Got it. Last one for me. And I'll jump back in queue. Obviously, as you called out free cash flow softer than then, and the revision in free cash flow is certainly higher than the change in the EBITDA guide. Just kind of walk us through the biggest buckets impacting free cash this year and how long would you anticipate it likely take to get back to the more typical 90% to 100% conversion rate that you target?

Robert VanHimbergen

Yes. So that we know that the reductions probably half earnings and half advances are related to timing of orders stand. Now I'd say that's partially offset by the trade working capital improvement actions that we've been focused on. And so we continue to focus on the fundamentals around improving our trade AR trade, AP and inventory.
And so as I mentioned, we did see some good improvements in those areas over the last year. And I'd expect to see continued trade working capital improvements as percent of sales here moving forward. And that's both on the acquisitions, but also even on the legacy businesses and also as those orders as those orders finally get released, again, we saw some of that the large orders get released in Q2.
And now I think as we get into 25, I think we'll be back to that 90% to 100% range and in the that order timeframe. But in the meantime, we're going to be focused on the fundamentals that we can control.

Operator

Thank you. At this time, we've reached the end of the question-and-answer session, and I'll turn the call over Kim Ryan for closing.

Kimberly Ryan-Dennis

Thanks again for joining us on the call today. We appreciate your ownership and your interest in Hillenbrand. We look forward to talking to you again in August when we report our fiscal third quarter results and wish you all a great week and a great day, and thank you.

Operator

This will conclude today's conference. You may disconnect your lines at this time, and we thank you for your participation and have a wonderful day.