Hillenbrand, Inc. (HI) Earnings Call Transcript & Summary

Greetings, and welcome to today's conference call, Hillenbrand to acquire Schenck Process Food & Performance Materials Business. [Operator Instructions] As a reminder, this conference is being recorded. At this time, I'd like to turn the call over to Sam Mynsberge, Vice President of Investor Relations. Thank you. You may begin.

Thank you, operator, and good morning, everyone. Thank you for joining us today as we discuss our planned acquisition of the Schenck Process Food and Performance Materials Business, which we announced earlier this morning. 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 referenced on today's call. Turning to Slide 3. A reminder 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. I encourage you to review Slide 3 of the presentation for a deeper discussion of forward-looking statements and the risk factors that could impact our actual results. With that, I'll now turn the call over to Kim.

Thank you, Sam, and good morning, everyone. We're very pleased to be here with you today to discuss this exciting opportunity for Hillenbrand and our stakeholders. Turning to Slide 5. As we announced in this morning's press release, we've entered into a definitive agreement to acquire the Schenck Process Food and Performance Materials Business or FPM for an enterprise value of approximately $730 million. We believe this transaction provides a unique and compelling opportunity for Hillenbrand and is in clear alignment with our strategy as we advance our position as a global leader of highly engineered, mission-critical processing equipment and solutions. As we've transformed into a pure-play global industrial company, our focus has been to build additional scale in attractive end markets such as food and recycling by expanding our capabilities and enhancing the value proposition we can bring to customers. These end markets are attractive, not only because they share common processing requirements and engineering expertise with our core business of plastics processing equipment, but also because they are historically less cyclical and underpinned by long-term secular growth trends. This transaction will create significant scale within our food growth platform with anticipated combined annual revenue of over $750 million or nearly 25% of our total enterprise revenues. It expands our North American presence, where FPM is a leader in food processing, particularly in the attractive pet food sector, while also building scale in other key end markets, including engineering plastics and chemicals in which we already also participate. The processing equipment offered by FPM, including weighing, feeding and filtration, to name a few, is highly complementary to the equipment and systems currently offered within our Advanced Process Solutions segment. This will enable us to drive additional scale benefits across numerous key functions such as engineering, manufacturing and procurement while also creating enhanced value for our customers through a more comprehensive offering. Furthermore, with approximately 30% of FPM's revenues coming from profitable recurring aftermarket parts and service, we are excited to be able to build additional scale in this attractive stable part of our business. Finally, we anticipate this transaction will provide compelling financial benefit with adjusted earnings per share accretion expected in the first full year and double-digit return on invested capital by year 5, supported by approximately $20 million of identified cost synergy opportunities. Following the close of the transaction, we expect our net leverage ratio to be approximately 3.2x, and we will be laser-focused on deleveraging with a plan to return to our target range of 1.7 to 2.7x within 15 months. Now turning to Slide 6, I'll provide an overview of FPM, which is headquartered in Kansas City, Missouri and has approximately 1,300 employees, primarily based in the U.S. and U.K. FPM is a global leader in highly engineered processing equipment and systems and is highly complementary to the Coperion and Linxis brands within our APS segment. For calendar year 2023, we expect this business to generate revenues of approximately $540 million with approximately 13% EBITDA margin. While this is lower than current company margins, we are confident we can bring margins into high teens over the next few years. From a product mix perspective, we expect approximately 30% of their revenue to come from an attractive aftermarket business. From an end market perspective, approximately 65% of their revenues are generated from sales in the food end market with nearly half of that coming from pet food, which has been and we believe will continue to be a high-growth area over the coming years. And finally, geographically, approximately 85% of revenues are generated in North America, which will contribute to an attractive geographic mix for Hillenbrand. Now to Slide 7. This transaction adds scale across the plastics and food value chain, where many of our other brands demonstrate leading value propositions. As we've discussed, while these end markets may seem dissimilar, they actually share a common backbone of similar products, technologies and processing requirements that allow us to, first, leverage our deep applications and systems engineering expertise and second, deploy the Hillenbrand operating model to drive profitable growth as they share best practices across the enterprise. Additionally, within these end markets, we benefit from not only long-standing customer relationships where our companies have earned the opportunity to create value through our equipment and systems, but we also benefit by providing an attractive aftermarket parts and services business over the life of the equipment we provide. Now on to Slide 8. Digging a little deeper into how FPM augments our current portfolio, both across technological capabilities and within specific customer applications. This transaction creates a more robust portfolio of processing technologies, enhancing the value proposition we can deliver to customers. FPM brings leading weighing, feeding and filtration capabilities among others, that will allow us to expand and optimize the comprehensive solutions we provide. As I mentioned earlier, FPM is a leading provider of pet food processing systems in North America and expands our presence across a number of other key customer applications, including baked goods and other processed foods as well as chemicals and engineering plastics. Turning to Slide 9. We've always believed the key differentiator of Hillenbrand is the balance of our portfolio across short cycle, mid-cycle and long cycle equipment, in addition to an attractive aftermarket business, which we believe allows for more consistent performance through economic cycles. The acquisitions we've made over the past 12 months have improved this balance by further expanding our presence in food and recycling, which are markets we believe will be less cyclical and have relatively higher long-term growth profiles. The addition of FPM enhances our profile by increasing our exposure to the attractive food end market while also growing our aftermarket opportunity. Turning to Slide 10. I'll now cover the $20 million in cost synergies we anticipate delivering through this transaction. As you know, when we evaluate the financial benefits of transactions, we incorporate only cost synergies that we have a high degree of confidence in achieving. Given the complementary nature of FPM's business, we see significant opportunity to utilize our scalable foundation and drive benefits across support functions like finance, IT and HR as well as operational functions like engineering, manufacturing and procurement. We see additional upside on the commercial front through cross-selling opportunities and further aftermarket expansion. I'm excited about the opportunities for us to create meaningful value as we deploy the Hillenbrand operating model to drive the integration plan and synergy realization. And with that, I'll now turn the call over to Bob to cover more financial details.

Thanks, Kim, and good morning, everyone. Turning to Slide 12. We believe this transaction brings clear financial benefits to Hillenbrand. The enterprise value of approximately $730 million represents a 10.7x multiple based on 2023 projected EBITDA and an attractive 8.3x multiple, including the cost synergies Kim just covered. For calendar year 2023, the business is expected to generate revenue of approximately $540 million with EBITDA margin of approximately 13% before synergies. As Kim mentioned, we expect the transaction to be accretive to adjusted EPS in the first full year and deliver double-digit ROIC ahead of our cost of capital by year 5. We plan to fund this transaction with a combination of cash on hand and capacity under our revolving credit facility, and we expect the transaction will close during the fiscal fourth quarter, subject to regulatory approvals and other customary closing conditions. After closing, we expect our net leverage to be approximately 3.2x, and we are confident in our ability to delever and plan to return to our targeted net leverage range of 1.7 to 2.7x within 15 months post close. Upon closing, the business will be included as part of the APS segment. Turning to Slide 13, I'll quickly provide an overview of what the combined company would look like. The transaction would increase our scale to approximately $3.3 billion in revenue and nearly $530 million in adjusted EBITDA on a less basis. As Kim mentioned, the transaction will be slightly dilutive to margins in the near term. We expect to improve FPM's margins to high teens over the next few years. The transaction would increase our exposure to food to nearly 25% of total combined revenues and create a more attractive geographic mix with our strong presence in North America. I'm excited about the opportunity this transaction brings for Hillenbrand. Together, we create meaningful scale and extend our leadership in the food processing industry. I'm confident in our ability to deliver upon our commitments and create long-term value for our shareholders. I'll now turn the call back over to Kim for closing remarks.

Thanks, Bob. Over the last 18 months, we've made a significant transformation at Hillenbrand. Through our recent acquisitions, we've acquired leading brands and expanded capabilities that we believe position us to deliver compelling customer and shareholder value. And with the divestiture of our legacy death care business, we created a pure-play industrial company with a strong presence in attractive end markets such as durable plastics, food and recycling, which are underpinned by long-term secular growth trends. As a result of these actions, we've meaningfully changed the profile of the company. In 2022, over 20% of our business was in secular decline was 4% attributable to the higher growth end markets of food and recycling. With the acquisitions of Linxis, Peerless, Gabler and Herbold, and the Batesville divestiture, today, our company is well positioned in growing end markets with nearly 20% in food and recycling, the acquisition of FPM builds upon this trend by adding even greater scale in food, bringing our food and recycling revenue to approximately 27% of revenues, creating a more compelling overall growth profile for Hillenbrand. This transaction is an exciting opportunity for Hillenbrand and continues our journey as a pure-play global industrial leader. I'm confident that it enhances our ability to drive long-term growth. And alongside the actions we've taken over the last year reaffirms our commitment to executing our profitable growth strategy to deliver meaningful value to our shareholders. Finally, I want to thank our associates for all of their significant work in getting us to this point. Without our talented teams around the world, our transformation would not be possible. I'm truly grateful for your contributions in supporting our purpose to shape what matters for tomorrow. With that, we'll now open the line for your questions.

[Operator Instructions] Our first questions come from the line of Matt Summerville with D.A. Davidson.

So just maybe first, can you talk about the organic CAGR that this business has experienced and how you can accelerate that and what we should expect going forward? And then also maybe comment on what needs to happen for you guys to punch above that $20 million in cost-related synergies? And then I have a follow-up.

Matt. Sure, I'll take the first one. Yes. So obviously, this is a private company and a competitor in certain markets. But with that being said, we did conduct due diligence and leveraged our third-party support team to go through that process. But this business is -- and has been a GDPplus business over the last several years. That excludes I'd say one large-scale pet food project. And so with that end, it was well above GDPplus. But you excluded still very strong growth with pet food being our largest driver of that growth. And so based on the diligence that we performed, the outlook remains consistent and strong for us, and we continue to see opportunities for us to just scale with what we've already done in the last 6 to 9 months and scale the food end market. Kim, do you want to take those synergies.

Yes. And relatively -- relative to synergies, as you are aware, we only evaluate those against -- those cost synergies against those items, which we are highly confident we can deliver on the cost side only. We do not justify acquisitions based on assumed revenue synergies. Although, as we've discussed before, we -- those are absolutely top of mind and top on a priority list of things that we will chase. As we have with previous acquisitions, we will keep you informed as appropriate on our progress towards those cost synergies. And as well as we're able to achieve opportunities in the market commercially, we'll continue to monitor those things and as appropriate, keep you updated on those. But we are very excited and confident about the $20 million that we have laid out there.

Understood. And then just as a follow-up, can you maybe talk about or quantify the magnitude of year 1 EPS accretion you expect from the transaction? And when do you expect to achieve the run rate synergy level, the $20 million run rate?

Yes. So Matt, I would say it's going to be double-digit EPS growth, certainly in the first 12 months. The synergies, I would think would be -- I'd say it's over course of 3 or 4 years, probably a little bit heavier of synergy achievement in the first half of that period versus the second half. But obviously, you can figure out with the margin profile and then the borrowing on this, you're going to be pretty strong EPS growth in that first 12 months.

Our next questions come from the line of Dan Moore with CJS Securities.

It's Pete Lukas for Dan. Bob, I apologize, I think you may have touched on it at the end of your remarks here. But previously, you described the food processing business is up mid- to high single-digit potential growth. Is that consistent with your expectations for the Schenck business? Or could that be even higher given the strong secular growth in pet foods?

Yes. So we -- back at Investor Day in December, we've highlighted, we think the food is GDPplus. We continue to think that with Schenck. But obviously, the pet food business, that growth is maybe even a little bit above that GDPplus. And so we'll be in that mid- to high single-digit growth here over a period of time. But I would say, for sure, minimum mid-single-digit growth.

Great. And then you answered most of the other questions, but just who will you primarily be competing with? And what is the competitive mode or primary entry barrier that differentiates these new assets?

So I would say in the food space, we compete against a lot of other incumbents. The other types of system providers like JBT, the Middleby's and GEA's, those are all system providers in this space. In terms of why do we feel confident if you look at some of the slides that we presented this morning, as we look across the technological capabilities that we believe we can deliver in a system, we think this really continues to build out those capabilities and allows us to, from a kind of a house brand perspective, be able to offer a very fulsome system solution that over time, we'll continue to be able to integrate and be able to service and sell throughout the life of that equipment, all the way from its initial capital sales through the servicing modernization and continued upgrades of those lines during their useful life. And we think that, that creates a compelling proposition to have one supplier to call to be able to service those systems and to be able to continue to work with our customers for their current needs as well as their future needs and how those systems can evolve over time.

[Operator Instructions] Our next questions come from the line of John Franzreb with Sidoti.

Congratulations. I must confess, I don't know a lot about pet foods. So I'm kind of curious, as you look at the whole portfolio of what they sell, is there any kind of customer concentration that we should be cognizant of? And how do they -- have they been growing their business?

So there are a lot of global multinational providers of pet foods in this space and some of the larger projects that they've been able to acquire over the past couple of years have been with large global multinational providers, which, again, is something that we think is a compelling opportunity for all of us. We have a global footprint. We have a global service organization. We have a global sales force. And through all of that, we can serve both local customers who are serving local needs as well as global customers who are looking to standardize their lines and their offerings all around the world. And so we believe this is -- this continues to be a great opportunity for us. But there is a mix of some very niche providers, also some very large providers that I'm sure brand names we would all recognize.

Okay. Fair enough. And how well funded was the company? Are you going to have to put additional CapEx into the business once you've taken it?

Yes. So generally, their CapEx profile has been similar to what we've had. And so John, as you think about, again, what we said at Investor Day, we're roughly in that 2% to 2.5% of sales for CapEx investment in our business. Profile is very similar. With that being said, I see us investing a little bit more in the next 2 years in this business. That will put us near that 2.5% sales level. And then I see it maybe dropping a little bit. So I think pretty consistent, but maybe in the next 2 years, a little bit more investment in the organization.

All right. Great. And I guess lastly, on the aftermarket side of the business, is there any particular parts or services they're selling to the aftermarket that is worth noting or that you think are particularly attractive?

I think there are a number of -- although these are not high wear systems, for instance, like we might have on the polymer side of the equation, things like filters and et cetera, are things that are regular parts of systems that get changed and has to be cleaned and serviced and upgraded to make sure that they are functioning properly in these systems. So they've got some inherent parts of opportunities within the systems just based on the applications that they're running and the need to make sure that those applications perform at peak.

Our next questions come from the line of Matt Summerville with D.A. Davidson.

Just a couple of quick follow-ups. Can you maybe delineate a little bit how your core plastics processing technology when systems differ versus what FPM provides.

You're talking on the plastics side.

Just on the plastics side, the overlap...

Yes. So there is more on the feeding and material handling side and ours -- and obviously, we have a very large footprint in, call it, mixing everything from lower-level mixing to very complex mixing capabilities, extrusion capabilities. And so you can imagine how we will have an opportunity to bring those things together. While we periodically compete against one another in this space, we also -- we buy certain pieces and parts from them, they buy certain pieces and parts from us. And so you can see how those things might come together. I mean many of our systems have some type of filtration capability. They are one of the providers that we purchase those things from -- sometimes they need extrusion or mixing capabilities. They may purchase some of their systems. They may outsource some of those pieces and parts of their systems to us. So you can see how those might come together. Certainly, what will be driving for them to come together, whether it's on the plastic side or on the food side.

Got it. And then just lastly, can you talk about what their aftermarket capture rate looks like relative to core Hillenbrand and whether the margin profile on their aftermarket business is similar to yours?

Yes. It's actually -- it's very similar. So they're roughly 30% of their revenues relate to aftermarket, so it's similar to Coperion and their margin profile between capital and equipment that delta is pretty similar as well, Matt. With that being said, we see opportunity to improve margins really in both the capital and the aftermarket profile that they have. And then obviously, you've got the synergies and the benefits from that to bringing those margins up over the next couple of years.

So Matt, your question is -- sorry, say that again?

I was just saying, the start of the question was kind of talk about your aftermarket capture rate versus their synergistic type of opportunity you may be able to drive there in.

And what I would say is at a customer level, we will -- there will be -- we'll do a lot more work because we do our aftermarket business as a part of the Hillenbrand operating model. We do a lot of analysis around part segmentation around take rates by those types of parts and by geography and by application so that we understand where we're penetrated and not. That's not the same way that some other companies capture their business. So work to be done as we're continuing down the path here to really have those types of comparatives at a more detailed level. At the highest level, we can see an aftermarket as a percent, we can see what types of applications those are in, but there will be a lot more granular analysis we do as we do that parts analysis as a part of our Hillenbrand operating model. And when we do think about margin expansion, whether it's in the parts business or the capital business, it's really what are the things that we're going to be able to scale for them that they were not able to do in their former ownership model. And that will be taking advantage of our global shared services around finance, IT, global supply management and global engineering center. Those are the types of things that we'll be able to avail them of and also the support from a global service organization. And coupled with their great footprint from a service organization standpoint in the U.S. will both be helping one another in that regard. So excited about some of the opportunities we believe that prevents -- presets for us, and we'll be working closely with that team to bring some of those to life.

There are no further questions at this time. I would now like to turn the floor back over to Kim Ryan for any closing comments.

All right. Thank you. Thanks to all of you for joining us today. We truly appreciate your interest in ownership, and we look forward to speaking with you again in August when we will report our fiscal Q3 earnings, and we wish you all a great rest of the week, and have a great day. Thank you.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and enjoy the rest of your day.