Hillenbrand Inc (HI) 2017 Q1 法說會逐字稿

Good morning, everyone and welcome come to Hillenbrand's earnings teleconference for the first quarter of fiscal 2017. A replay of this call will be available until midnight Eastern time February 16, 2017 by dialing 1-800-585-8367, toll-free in the United States and Canada or 416-621-4642 internationally and using the conference ID number 57047494. This webcast will be archived on the Company's website at http://ir.hillenbrand.com through March 1, 2017. If you ask a question during today's call, it will be included in any future use of this recording. Also note that any recording, transcript or other transmission of the text or audio is not permitted without Hillenbrand's written consent. At this time, it's my pleasure to turn the conference over to Joe Raver, President and Chief Executive Officer of Hillenbrand. Mr. Raver, please go ahead.

Thank you, operator. Good morning and thanks for joining us on our first-quarter fiscal year 2017 earnings call. Joining me today on the call will be Kristina Cerniglia, our Chief Financial Officer. For the Q&A portion of the call, we will be joined by Kim Ryan, President of Coperion.

During the call, we will be referencing a slide presentation, which can be found on our website. Today, I will discuss our first-quarter highlights, as well as how we are progressing on our strategy. Kristina will then present additional detail on the Company's financial performance and discuss our outlook for the rest of fiscal 2017 before we open up the call for Q&A.

Prior to getting into our prepared remarks about the business, I'd like to remind you that, during this call, we may use 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 call, we will be discussing certain non-GAAP operating performance measures. I encourage you to take a look at our 10-K and 10-Q, which can be found on a website, for a deeper discussion of 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 their reconciliation to GAAP financial measures, please refer to our 10-Q and the slides presented with this call.

With that, I'd like to begin with a brief reminder of our strategy. As you know, our vision is to develop Hillenbrand into a world-class global diversified industrial company. We seek to leverage our strong financial foundation and the Hillenbrand operating model to deliver sustainable profit growth, revenue expansion and free cash flow across our business.

We reinvest both organically and in acquisitions to build leadership positions in key markets to drive profitable growth and create value for our shareholders. The Hillenbrand operating model is central to our vision of transforming Hillenbrand into a world-class company. It gives us a framework and process that we believe helps produce consistent and sustainable results across our business.

The foundation is in the principles that have driven Hillenbrand since our inception. Hillenbrand has grown and evolved. We have enhanced our operating marginal to strengthen its application to our business and to bring focus to the critical few capabilities and initiatives with the most potential for creating sustainable value for our shareholders.

With that backdrop, let me move on to a high-level summary of first-quarter performance. Our first-quarter results were largely in line with internal expectations. During the quarter, we saw sustained momentum from our plastics business. This is a continuation of the solid performance we saw last quarter. We've been successful in winning a number of very large, complex projects for which our design and engineering expertise have been key differentiators.

We have a strong track record of delivering innovative and high-quality systems for these projects, which has helped us become a key partner to our largest petrochemical customers with the most demanding applications. These projects contributed to revenue growth in the quarter and they also provided some growth in the backlog over the prior year. Our order pipeline is healthy and we are seeing continued strength in the US, along with additional opportunities in the Middle East and Asia for large polyolefin projects.

Now let me comment on some of the other markets served by our Process Equipment Group. Most of these markets appear to have stabilized over the past few quarters; however, persistently low commodity prices continue to weigh on demand for parts and capital in many of our core industrial end markets. While the relative stability is encouraging, we still believe there's overcapacity in many of these markets and we are unlikely to see any meaningful growth in this fiscal year.

Batesville's revenue was down for the quarter on lower burial sales, but the business continues to find ways to deliver strong margins and cash flow. We've used the Hillenbrand operating model to bring focus to areas where we can create the most value for our customers. For example, Batesville is using voice of the customer research to help bring more innovative products to market and to improve quality and service, which are key differentiators for us.

In addition, we are investing in technology to better showcase our products, drive greater efficiency for the funeral homes that partner with Batesville. And as always, we are also constantly becoming more efficient by applying LEAN across the entire Batesville value chain.

In total, we finished the first quarter with modest revenue growth driven by the large plastics projects, as well as the addition of Red Valve to our Process Equipment Group. We also grew the bottom line with GAAP earnings per share of $0.34 and adjusted earnings per share of $0.42, which is up 2% from the prior year.

Over the past year, we've taken actions across our Company to simplify our business and reduce costs, protect profitability in the midst of challenging end markets. We continue to execute on previously announced restructuring actions, which are on track to deliver targeted savings this fiscal year. Overall, we are pleased with the way our businesses have executed given the challenging market conditions we faced.

Before turning the call over to Kristina, I'd like to provide a brief update on our most recent acquisitions, ABEL and Red Valve. These flow control businesses have now been a part of Hillenbrand for a full year and are fully integrated in all back-office functions. We completed the consolidation of a small production facility, which went very well and we are now collaborating on opportunities to leverage our global sales channel, particularly in North America to accelerate growth. We really like the diversification and growth potential these businesses have added to our portfolio. They are both strong businesses with terrific value proposition and solid margins.

As we look forward, M&A remains a key component of our profitable growth strategy with an emphasis on building leadership positions in our current industrial businesses. We will continue to follow a disciplined approach to ensure that when we execute our next acquisition, it will be a good fit strategically for Hillenbrand and a good investment for our shareholders.

Finally, we continue to monitor the current political landscape closely. It is still too early to predict how the new administration is likely to affect our Company in the coming year, but we are working hard to understand how potential policy changes could affect our business.

With that, let me turn the call over to Kristina for a bit more detail on the financial results for the quarter.

Thanks, Joe and good morning, everyone. As we reported yesterday, revenue was $356 million in the first quarter. That is an increase of 1% over last year driven by Red Valve and large projects in our plastics business offset by Batesville, other industrial markets and an unfavorable currency impact of 1%. Process Equipment Group revenue was up 4% and Batesville was down 2%. Organically, revenue was down 2% as we experienced lower volume in both segments.

GAAP net income of $22 million was 9% higher than the prior year, resulting in earnings per share of $0.34. Adjusted net income of $27 million was 2% higher than prior year resulting in an adjusted earnings per share of $0.42. Adjusted EBITDA of $56 million was down 2% and EBITDA margin declined 60 basis points to 15.8%.

Our adjusted effective tax rate for the quarter was 26.5%, 400 basis points lower than prior year. The decrease in the rate was primarily a result of a discrete tax benefit on share-based compensation. It is not easy to predict the impact of discrete items, but we now expect our adjusted effective tax rate to be approximately 30% for the full year. Excluding the discrete items, we expect the rate to be in line with our previously communicated guidance of 31%.

Our operating cash flow performance was again solid this quarter and we are pleased with our continued ability to generate cash. You will recall from our last call that we leveraged our strong cash flow to make an $80 million contribution to our US pension fund at the beginning of the first quarter. We expect that contribution to be neutral to earnings this year, but to provide a sustained reduction to future pension expenses.

We had an operating cash outflow of $49 million in the quarter compared to $36 million of cash generated in the prior year with the pension contribution driving the majority of the difference. Excluding the pension contribution, we generated $23 million of operating cash flow in the quarter.

In addition to the pension payment, we also returned $13 million to our shareholders in the form of cash dividends and we did not repurchase any shares of common stock during the quarter.

Turning to the next slide, let me cover segment performance beginning with the Process Equipment Group. Process Equipment Group revenue of $222 million in the quarter was up 4%. Organically, revenue was down 1% or flat excluding currency headwinds. As Joe noted, our plastics business remained a bright spot through the first quarter as we had momentum coming out of last year and that continued to be a source of growth. Other industrial markets remained sluggish and were largely flat or slightly down year-over-year.

On a positive note, order backlog grew 4% sequentially to $520 million, an increase of 3% compared to the prior year. Again, plastics projects drove most of the increase. Process Equipment Group adjusted EBITDA margin of 14.8% was down 60 basis points from last year. The type of new projects we are seeing include large compounding and extrusion systems that tend to have slightly lower margins compared to the smaller equipment we sell into other industrial markets, which are currently down. We expect to continue to see some of that mix pressure over the next few quarters as a number of those large projects flow through.

While mix is down, it was partially offset by the work we are doing with the Hillenbrand operating model to drive strategic pricing and productivity initiatives and to continue to execute on our restructuring actions. Additionally, we are making targeted investments aligned with our profitable growth strategy, which we expect to contribute to future margin expansion.

Moving to the Batesville business, revenue for the quarter was $135 million, which was down 2% from last year. The decrease was driven by lower burial sales as a result of the market, as well as the application of our operating model, which drove intentional reductions in less profitable productlines. Adjusted EBITDA margin of 23% was flat compared to the prior year as the lower burial sales were offset by savings related to restructuring actions taken in 2016, as well as ongoing productivity initiatives across the business.

The Batesville team continually identifies opportunities to drive cash generation and hold costs in check leveraging their LEAN expertise as part of the Hillenbrand operating model to protect the profitability of the business and their position as a market leader.

With that, let me turn to our guidance for fiscal 2017. We are reaffirming our guidance for top-line growth, as well as earnings for the year. As a reminder, we expected consolidated revenue growth of 1% to 3%, revenue from Process Equipment Group is projected to grow 3% to 5% with growth being driven by continued strength in large plastics projects, some of which are in our current backlog. We expect capital investment in the other industrial markets we serve across the Process Equipment Group to remain relatively stable with demand that is flat or slightly lower year-over-year.

Batesville is expected to deliver revenue that is down 1% to 3%, in line with our expected annual decline in burial volume. We expect slightly lower margins as a result of a lower volume, as well as commodity cost inflation offsetting the savings from last year's restructuring actions. We are targeting the midpoint of our guidance range of 30 to 80 basis points of EBITDA margin expansion in the Process Equipment Group this year. We expect growth to be driven by pricing and productivity initiatives, as well as savings from prior-year restructuring activities. We expect those gains to be partially offset by mix, which should be more heavily weighted towards large systems projects.

GAAP EPS for 2017 is projected to be $1.80 to $1.95 and adjusted EPS for 2017 is projected to be $1.95 to $2.10. We also remain focused on driving strong cash flow performance. Excluding the impact of the one-time pension funding, we expect to deliver free cash flow that is greater than our net income. At this time, I will turn the call back to Joe for his concluding remarks.

Thanks, Kristina. This year started consistent with our expectations with strength in large projects in our plastics business and relative stability across other industrial end markets. We expect those trends to continue over the next few quarters.

We are pleased with the results we are seeing from actions we have taken across the business. Over the past year, we've reduced costs and improved our ability to execute on strategic initiatives. As always, we are leveraging the Hillenbrand operating model to make improvements in our business that are moving us closer to our objective of establishing Hillenbrand as a world-class diversified industrial company in the eyes of our customers, our employees and our shareholders.

That concludes our prepared remarks. For today's Q&A section, we are joined by Kim Ryan, President of Coperion. We are ready to take your questions. Operator, would you please open the lines?

(Operator Instructions). Liam Burke, Wunderlich.

Thank you. Good morning, Joe. Good morning, Kristina. Joe, on the polymer business -- so the systems business, you've got a design and engineering expertise. These are high-end systems. Is this an opportunity for you to take marketshare globally since typically we think about the business as being distributed equally among competitors?

Yes, that's a great question and while we have two really large competitors on one part of the business, the extrusion part of the business and then one really large competitor on the material handling side of the business, we each have our own little niches and things that we do maybe a little bit better than the others. So a little bit depends on where in the world the project is, specifically what the customer situation is and who can be the most creative in terms of solving the problem.

We feel, particularly over the last couple of years, we have done well in terms of winning our fair share of projects and part of that has been we've had a significant chunk of those projects in North America where we have had a significant presence for a long time, maybe a stronger presence than some of our competitors. So we don't -- these projects are big. It's hard to discern marketshare really easily except for over a long period of time, but I would just say that we feel like we have done very well in terms of maintaining or enhancing our market position on these large projects.

Okay. Thank you. And just touching on aftermarket sales growth. You had an organizational initiative to grow that business. How do you feel you're progressing there? I know you saw growth this quarter, but are you where you need to be?

We are never satisfied, but, no, I think we feel very good about our ability to grow the parts and services business, not just in the large polyolefin projects in the plastics business, but also across all of our businesses. As you'll recall, we had an exceptionally strong 2016. We won a number of large projects in 2016 that come along every once in a while in the polyolefin side. Profitability was up and we expect that to have a strong 2017 as well. It's a little bit more challenging on a year-over-year comparison, but we've got leaders identified in all those businesses. We'll work very hard in terms of making sure we have the right products in the right places to serve our customers as well as we can and we continue to use the Hillenbrand operating model to segment the business, identify those places and those products where we can get competitive advantage and win more marketshare.

So we feel really good about that part of the business. Expect to continue success there. As you know, Liam, this is not one of those things that you win a big project necessarily and you see this big bang. It's nice, steady, incremental performance. We believe we've been winning marketshare across our businesses for the last couple of years and we expect to continue to do that as we go forward.

Great. Thank you, Joe.

I was just going to add to that is we do continue to see our parts and service revenue grow at a faster rate than our capital equipment.

Great. Thank you.

Dan Moore, CJS Securities.

Good morning. This is actually Robert Majek filling in for Dan this morning. What drove the modest uptick in the PEG backlog?

If we look at the PEG backlog, it was primarily driven by the large projects in our plastics business.

Got it. Any signs of life in frac sand, energy or potash?

So let me just take those one at a time. I think on the potash side, you can go out and Google potash prices and you can see they are at five-year lows, so the whole fertilizer arena is still pretty depressed and not a lot of investment on the fertilizer side. So that's potash and fertilizer.

On frac sand, we are hearing a lot about natural gas prices are up, rig counts are up. We are hearing a lot about increased use of sand. I will tell you that there's overcapacity in that market and we can, based on spare parts usage, etc., we can try to estimate capacity utilization in the market. And so we have a bit of a way to go to see increases in utilization that will drive capital demand. We are seeing a little bit of an uptick in parts right now, replacement parts, wear parts, but we are hearing quite a bit of noise, but we haven't really seen it show up yet in orders and so there's a little bit of a lag between when demand increases and we will start to see any appreciable increase in orders.

On the energy side, on the coal power side, for example, we had a little spike in December where we saw, with some cold weather and natural gas prices higher, a little bit more coal burned. We are expecting really very, very modest growth or flat in that on a year-over-year basis after a couple years of coal being down. So generally those markets -- the way we characterize those markets is they continue to be flat, some even slightly down. And so we don't expect to see any appreciable increase that will drive particularly our capital business over the next couple of quarters. Does that make sense?

Yes, thank you. That was very helpful. Just lastly, from me, what are your expectations for fiscal 2017 free cash flow ex the pension contribution?

So we generally say that free cash flow is going to be greater than net income excluding the pension contribution.

Thank you.

(Operator Instructions). John Franzreb, Sidoti.

Good morning, everyone. Maybe if we can switch over to Batesville for a second. It seems like the flu season was much weaker than a year ago. How does it compare versus your expectations and relative to your expectations for hitting the targets you set for the full year?

John, we saw a pretty big flu season -- a really big flu season a couple of years ago, not much of a flu season last year. As we set guidance, you can't really tell, but you start to get early indications of whether the vaccine is going to be a match. So we expect -- I think we've guided to down 1% to 3% on the [basal] side. We are experiencing really what we expected, which is a relatively minor flu season with very little mortality associated with it. Cremation continues to grow and so we think that down 1% to 3% is probably a good estimate for the year. And we experienced that in the first quarter.

Okay. Just sticking with Batesville, commodity costs, can you review the impact of commodity costs on Batesville? I believe you had some favorable headwinds in the second half of the last fiscal year. Is it starting to impact you at all or can you walk through how that is playing out?

Sure. So I would say for the quarter we did see about $1.5 million worth of pressure on the commodities line in Batesville, but that was offset by the savings as a result of our restructuring actions that we took last year and the continued productivity initiatives that are going on in that business. This quarter, if you break that down between really steel, fuel and wood, I would say that fuel is the largest driver of the year-over-year increase in commodities and then followed by steel.

As we go forward, however, we can't really predict what fuel is going to do, but we do know where our steel is going to be because we lock into these long-term contracts. So we are expecting some commodity pressure in steel starting in the second quarter because, as you mentioned, last year, we had some favorability. We saw nice favorability in steel starting in the second quarter and the third quarter. So you are going to see that pressure hit us in the second and third quarter.

Got it. And on the M&A front, Joe, you mentioned that ABEL and Red Valve have been fully consolidated. Can you talk a little bit about the opportunity pipeline as far as acquisitions? What kind of businesses you are looking at? Do you expect to close some of them in this fiscal year? Any kind of color would be appreciated.

Sure. So let me just take a big step back. A couple of things. One is, when we are thinking about M&A as we went through our strategy process this past fiscal year, we are very focused on generating profitable growth and part of that profitable growth strategy, M&A is one way we get there. So one thing is we will be focused and have been focused on businesses that are closest, that are closer to our current businesses so they are not too far away from our current businesses. So these would be tuck-in acquisitions or adjacent acquisitions that are relatively near to our current businesses, particularly on, of course, the Process Equipment side of the business.

So with that said, we have a very active program. We continue to have a very active pipeline. We don't really talk about when we expect a deal, if or when we expect a deal to close. I would just say to you that we continue to be very active. I believe that we are very focused in terms of the kinds of businesses that we are looking at to build out our growth strategy.

And then I guess the last thing I would say is there's a -- M&A pipeline or activity is full. There are businesses out there. I would say multiples continue to be relatively high in some of those spaces that we are looking at, but it's an active market. We are active. We feel like we are really focused and understand where we want to go strategically. But as you know, given relatively full multiples, we need to be very disciplined and make sure that it not only -- any acquisition fits strategically with our business, but that we also get a great return on it so that it's good for shareholders. So we continue to be active, we think we are focused and that's all I would comment at this point.

Okay. And then just on Process, you mentioned earlier the pricing initiatives. Can you review how successful you've been in implementing them in this environment and just walk us through where you expect to go on the pricing initiative front?

Sure. When we talk about pricing initiatives, we are really talking about strategic pricing. Part of our operating model is we are constantly segmenting our business to understand where we create the most value for our customers and that's typically where we have the highest margins. So we are always looking to understand strategically how we can better price. Sometimes that means the ability to take price up because we create lots of value; sometimes that means in some cases for example in some parts categories where it's taking prices down to drive more volume.

So we have programs really driven across our businesses. We've been doing training, so we've been doing sales and pricing training for all of our businesses, particularly on the Process Equipment side of the business, as well as using standard processes and programs and best practices and sharing those across the business. So this is a journey; this is not a one-time big kind of hit that we get, so this is a journey and as we continue to move forward, we continue to focus on those places where we think we can improve our pricing effectiveness based on the competitive environment, our ability to add value, etc. So we expect to continue to get gains from pricing throughout fiscal 2017 and beyond. We think there's more opportunity for us to get better on the pricing side.

Got it. Kristina, can you quantify the impact of pricing in the first quarter?

We generally don't comment on what the pricing impact is, but I can tell you it definitely offset the mix impact from the large projects.

Okay. Fair enough. Thank you for taking my questions.

Spencer Joyce, Hilliard Lyons.

Good morning. Thanks for taking my call. Just a couple of quick ones from me. Joe, perhaps this first one is for you. Could you give us a little color on what some of the exited business items or business lines were with Batesville? Were they a particular casket offering or perhaps some of the ancillary services that you all culled in the name of profitability?

Sure. So as I talked about a little bit earlier, we are constantly segmenting our business to understand where we create value for customers and where we generate profitability and productlines. I think we ended up at Batesville, we had -- as we went through that exercise, we found a number of productlines that had high levels of complexity, created manufacturing issues in our plants. We were not selling high quantities of those products. So we exited some of those productlines.

I think it's important to note though that we constantly innovate and bring new products to the market as well. We probably had more successful product launches here in the last couple years than we've had in many years and so this was really a productline rationalization for lower volume, more highly complex products that we offer. It happens that some of those were at the lower end of the product range as well for us. So we've had a nice -- it's had a nice impact in terms of improved efficiencies in our plants and we've been able to replace some of those products with more simple products that have higher customer appeal and we generate better sales from. So that's how we think about productline rationalization and essentially that's what we've done on the Batesville casket side.

Okay. So essentially, in some sense, it was just some natural turnover in your offerings there?

It was some natural turnover in a particular category; most of it was some natural turnover in a particular category at the lower end of our productline that we again have simplified and tried to replace some of those products with again more simple products that run through our plants easier, but also are better received by our customers.

Okay. Switching gears to plastics, great to see a second sequential quarter here of some uptick in activity for some of the large stuff. My question is are we working through perhaps some pent-up demand or are we back to a sustainable base for growth? I know it's a little tough when we are talking about a bit of a project-based business, but any kind of delineation there would be helpful.

Yes. Spencer, we have Kim Ryan who is the President of our Coperion business who really is -- that's our plastics business. Let me turn this question over to Kim.

Good morning. How are you? I just wanted to respond on that and indicate that, from our point of view, I wouldn't characterize this as pent-up demand. I think we saw some delays last year in just the normal flow of projects, but this business is characterized by periods of investment and then utilization of that investment and right now, what we are seeing in the projects that we've been awarded, as well as the pipeline is just a good solid steady flow of projects generally in all geographic regions for our large machines business.

Okay. Perfect. That's really helpful. Great to hear. That's all I had. Thanks.

We have no more questions. Now I would like to turn the call over to Joe Raver for final remarks.

Thank you, operator and thanks to everyone for joining us today on the call. We look forward to speaking with you again in May as we report our fiscal second-quarter results. Thanks again and have a great day.

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