Business Overview: Decades of Transformation and Growth

Hillenbrand, Inc. (HI) is a global industrial company that has been at the forefront of providing highly-engineered processing equipment and solutions to customers worldwide. With a diverse portfolio of leading brands, the company has carved out a strong presence in large and attractive end markets, such as durable plastics, food, and recycling.

Hillenbrand's roots can be traced back to 1906 when it was founded as a manufacturer of caskets and funeral home products under the Batesville brand. For over a century, Batesville was the core of Hillenbrand's business. In 2010, the company began to diversify its portfolio by acquiring industrial brands that served large, attractive end markets beyond death care. This strategy led to the acquisitions of companies like K-Tron, a maker of feeding and pneumatic conveying equipment, and Coperion, a manufacturer of compounding, extrusion, and material handling equipment. These acquisitions positioned Hillenbrand as a global leader in the processing equipment industry.

In 2020, Hillenbrand made a major strategic shift by acquiring Milacron, a leading manufacturer of plastics processing equipment and technologies. This transformative deal significantly expanded Hillenbrand's presence in the highly engineered, durable plastics end market. Following the Milacron acquisition, Hillenbrand divested its historical Batesville business in 2023, becoming a pure-play industrial processing equipment and solutions provider.

Throughout its history, Hillenbrand has faced various challenges. In the early 2000s, the company struggled with declining death rates in the U.S. that impacted its Batesville business. The 2008 financial crisis also presented significant headwinds, as demand for industrial capital equipment dropped sharply. Hillenbrand navigated these challenges by diversifying its portfolio and focusing on operational excellence and productivity initiatives.

Today, Hillenbrand is composed of two core reportable operating segments - Advanced Process Solutions (APS) and Molding Technology Solutions (MTS). The APS segment specializes in the design, manufacture, and service of highly-engineered process and material handling equipment, systems, and aftermarket parts for a variety of industries, including durable plastics, food, and recycling. The MTS segment is a global leader in highly-engineered equipment, systems, and aftermarket parts and service for the plastic technology processing industry, with a comprehensive product portfolio that includes injection molding and extrusion equipment, hot runner systems, process control systems, and more.

Navigating Macroeconomic Challenges: Resilience and Adaptability

Hillenbrand has demonstrated its resilience and adaptability in the face of various macroeconomic headwinds. During the fiscal year 2024, the company navigated supply chain disruptions, material and labor inflation, and uncertain customer decision-making amid broader economic conditions, such as rising interest rates and geopolitical tensions.

Despite these challenges, Hillenbrand reported consolidated revenue of $3.18 billion, representing a 30% increase over the prior year. However, organic revenue declined by 5% as favorable pricing, record aftermarket revenue, and growth in large polyolefin systems were offset by persistent order delays for mid-sized capital equipment across key end markets.

Adjusted EBITDA for the full year increased by 6% to $512 million, though it declined 12% on an organic basis due to the impact of lower volume and cost inflation, which more than offset the benefits of pricing, restructuring actions, and synergies from recent acquisitions.

Strategic Acquisitions and Integration: Driving Diversification and Synergies

Hillenbrand has been actively pursuing strategic acquisitions to expand its capabilities and broaden its end market exposure. In fiscal 2023, the company completed the acquisitions of Schenck Process Food and Performance Materials (FPM) and LINXIS Group SAS, both of which are highly complementary to its existing APS segment.

The integration of these acquisitions has been a key focus for Hillenbrand, with the company making significant progress in aligning go-to-market strategies, standardizing pricing practices, and realizing operational efficiencies. As a result, the FPM business has been performing well, delivering mid-teens EBITDA margins that are ahead of the company's initial expectations.

Financials and Liquidity

Hillenbrand has also been diligent in managing its capital structure, with debt reduction remaining a top priority. As of the end of fiscal 2024, the company's net debt to adjusted EBITDA ratio stood at 3.3x, down from 3.5x in the previous quarter, underscoring its commitment to deleveraging.

For the most recent fiscal year 2023, Hillenbrand reported revenue of $2.83 billion, net income of $107.1 million, operating cash flow of $207.0 million, and free cash flow of $137.7 million. In the most recent quarter (Q4 2024), the company achieved revenue of $837.6 million, net income of $12.0 million, operating cash flow of $167.0 million, and free cash flow of $154.0 million. Year-over-year, revenue increased by 10%, while net income decreased by 29%. The increase in revenue was primarily driven by the acquisition of FPM and higher aftermarket sales, partially offset by lower capital equipment volumes. The decrease in net income was mainly due to higher integration costs and tax expense, partially offset by a gain on a sale-leaseback transaction.

In terms of liquidity, as of September 30, 2023, Hillenbrand had a debt-to-equity ratio of 1.29, cash and cash equivalents of $242.9 million, and $482.7 million available under its credit facility as of June 30, 2024, with $455.7 million immediately available. The company's current ratio stood at 1.25, and its quick ratio was 0.78 as of September 30, 2023.

Segmental Performance: Navigating Demand Dynamics

In the APS segment, organic revenue declined 2% in fiscal 2024, as favorable pricing and record aftermarket revenue were more than offset by lower capital equipment volume, particularly in the engineering plastics, recycling, pet food, and specialty materials end markets. Order pipelines remain healthy across most regions, but customer decision-making timelines have been uncertain, leading to delays in capital expenditures.

During the three and nine months ended June 30, 2024, the APS segment reported net revenue of $569.4 million and $1.7 billion, respectively. Gross profit for the segment was $205.2 million (36.0% gross margin) and $594.7 million (35.0% gross margin) for the respective periods. The segment benefited from the acquisition of the Schenck Process Food and Performance Materials business in September 2023, which added $136.7 million and $412.2 million to net revenue in the three and nine month periods.

The MTS segment experienced an 11% decline in organic revenue, primarily driven by lower backlog entering the year for injection molding equipment and ongoing soft demand for hot runners, particularly in North America. However, the segment saw a sequential improvement in orders throughout the year, with injection molding equipment demand in India and China showing signs of stabilization.

For the three and nine months ended June 30, 2024, the MTS segment reported net revenue of $217.2 million and $648.3 million, respectively. Gross profit for the segment was $61.2 million (28.2% gross margin) and $173.4 million (26.7% gross margin) for the respective periods. The segment experienced a decline in injection molding equipment volumes, which was the primary driver of the lower net revenue and gross profit.

Both segments were impacted by inflationary pressures and supply chain challenges during the reported periods, which affected costs and operating margins to varying degrees. The company also recorded significant impairment charges related to goodwill and intangible assets in the MTS segment during the third quarter of fiscal 2024.

Hillenbrand's Outlook: Cautious Optimism and Continued Execution

For fiscal 2025, Hillenbrand is guiding for total company revenue of $2.93 billion to $3.09 billion, reflecting a 3% to 8% decline compared to the prior year. This decline is primarily driven by the APS segment, which the company expects to be down 5% to 10%, while MTS is expected to remain relatively flat, with revenue projected to decline 2% to increase 2%.

The company's adjusted EBITDA is expected to be in the range of $452 million to $488 million, down 5% to 12% year-over-year, as the impact of lower volume is partially offset by continued cost management and integration initiatives. Hillenbrand anticipates adjusted EPS of $2.80 to $3.15, interest expense of approximately $105 million, an adjusted effective tax rate of approximately 29%, operating cash flow of approximately $200 million, and capital expenditures of approximately $50 million.

For the APS segment, fiscal 2025 revenue is projected to be between $2.05 billion and $2.175 billion, representing a 5-10% decrease, with an adjusted EBITDA margin of 18% to 18.5%. The MTS segment is expected to generate revenue between $875 million and $915 million, ranging from a 2% decrease to a 2% increase, with an adjusted EBITDA margin of 16.3% to 17%.

For the first quarter of fiscal 2025, Hillenbrand expects total revenue of $685 million to $705 million and adjusted EPS of $0.52 to $0.57.

Despite the near-term macroeconomic uncertainties, Hillenbrand remains confident in its long-term growth prospects, leveraging its diversified portfolio, global footprint, and operational excellence to navigate the challenges and deliver value to its shareholders.

Conclusion: Shaping the Future of Industrial Processing

Hillenbrand's transformation into a pure-play global industrial leader has positioned the company for long-term success. With its focus on highly-engineered processing equipment and solutions, the company is well-equipped to capitalize on the growing demand for sustainable and efficient industrial technologies across its key end markets.

While the near-term outlook reflects the impact of macroeconomic headwinds, Hillenbrand's commitment to strategic acquisitions, operational excellence, and financial discipline underscores its resilience and adaptability. As the company continues to execute on its integration and cost optimization initiatives, investors can look forward to Hillenbrand's continued evolution as a market leader in the industrial processing space.

The processing equipment and solutions industry that Hillenbrand operates in is expected to see moderate growth, driven by factors such as the expanding global middle class and focus on sustainable solutions. The overall CAGR for Hillenbrand's key end markets is estimated to be in the mid-single digits over the next several years, providing a positive backdrop for the company's long-term growth strategy.

Geographically, Hillenbrand generates the majority of its revenue (around 50%) in the Americas, with the remainder split between Asia (around 25%) and Europe/Middle East/Africa (around 25%). Key markets include the United States, China, India, and Germany, highlighting the company's global reach and diversified customer base.

As Hillenbrand continues to navigate the evolving industrial landscape, its ability to innovate, integrate acquisitions effectively, and maintain operational efficiency will be crucial in driving long-term shareholder value and solidifying its position as a leading player in the global industrial processing equipment and solutions market.