Day: November 24, 2023

Funding Thesis

Hillenbrand, Inc.’s (NYSE:HI) income faces near-term income headwinds from decrease backlog and order bookings in each the Superior Course of Options (APS) and Molding Know-how Options (MTS) segments. The present macroeconomic uncertainty and a high-interest fee surroundings are leading to a rise in the choice timing of the corporate’s clients, significantly throughout the massive initiatives which is impacting orders and gross sales for its APS enterprise. In its MTS enterprise, a tender order surroundings for its capital tools enterprise together with a decline in orders for injection molding tools is anticipated to adversely influence the corporate’s income within the coming quarters. As well as, the corporate is unlikely to pursue M&As within the close to time period given its excessive web leverage of three.2x.

The near-term margin outlook is difficult with the adverse influence of decrease margin Schenck’s Meals and Efficiency Supplies (FPM) acquisition and quantity deleverage. The corporate’s valuation is at a reduction versus the historic averages. Nonetheless, I consider it is best to attend on the sidelines until order developments enhance and web leverage reaches the focused ranges. Therefore, I’ve a impartial score on the inventory.

Income Evaluation and Outlook

After seeing good progress in income within the final couple of years, the corporate’s natural income progress turned adverse final quarter. I beforehand coated the inventory in August after I raised considerations about rising macroeconomic uncertainty and declining backlog impacting the corporate’s natural income. Within the fourth quarter of 2023, the corporate reported a 26.3% Y/Y enhance in web revenues to $762.Eight million primarily attributed to the favorable influence of acquisitions, together with a $43 million contribution from the Schenck Course of Meals and Efficiency Supplies acquisition, which was accomplished on September 1, 2023. Nonetheless, on an natural foundation, revenues declined 1.2% Y/Y as greater pricing and elevated quantity within the Superior Course of Options section was greater than offset by decrease quantity within the Molding Know-how Options section.

Within the Superior Course of Options section, web revenues grew 57.3% Y/Y primarily because of the favorable influence of acquisitions together with the Schenck Course of Meals and Efficiency Supplies acquisition (accomplished in September 2023), Peerless Meals tools acquisition (accomplished in December 2022) and LINXIS Group SAS acquisition (accomplished in October 2022). Natural revenues rose 6.7% Y/Y pushed by favorable pricing and better aftermarket elements and repair revenues.

Alternatively, the Molding Know-how Options section’s web income declined 10.4% Y/Y and 10.6% Y/Y organically on account of a decline in scorching runner and injection molding tools gross sales.

Wanting ahead, the corporate’s near-term outlook is difficult.

If we have a look at the corporate’s natural backlog, it was down 14.3% Y/Y on the finish of FY23 with the APS section natural backlog down 8.6% Y/Y and the MTS section backlog down 36.5% Y/Y.

Within the APS section, the present macroeconomic uncertainty and high-interest fee surroundings are leading to clients delaying choices on a number of massive initiatives. Whereas administration has guided for natural progress of between 3% and eight% Y/Y for this section relying on resilient aftermarket gross sales in addition to energy within the meals and pharma and recycling finish market to offset the influence of the slowdown in different markets, I’m skeptical. Aftermarket gross sales represent ~28% of the APS section’s complete gross sales whereas capital tools is ~72% of complete gross sales. So, it’s unlikely that Aftermarket progress can offset the influence of ~8.6% Y/Y decline in capital tools backlog. Finish market-wise, whereas meals and pharma together with the lately acquired FPM enterprise are ~34% of APS section income, and recycling is round 3%, I don’t assume they need to be capable to offset the slowdown in Plastics and Chemical compounds which is 51% of section income and this has been evident from the latest natural backlog decline. I consider administration is constructing in some type of enchancment of their massive undertaking orders of their steering, particularly within the again half of the 12 months however I consider a wait-and-watch strategy could also be prudent.

MTS is doing even worse with a backlog declining 36.5% Y/Y on account of decreased orders for injection molding tools and this could end in a Y/Y decline in revenues.

General, the corporate has guided for -3% to three% Y/Y natural income progress and I’m in the direction of the decrease finish of the steering vary and consider if the order fee would not enhance because the 12 months progresses, there’s a potential for downward revision in natural progress steering.

Inorganically, the story is healthier with the latest acquisition of Schenck FPM enterprise which has an annual income of ~$547 mn. Nonetheless, after the acquisition, the corporate’s web leverage (web debt to EBITDA) has climbed to three.2x and I consider the near-term focus shall be on debt compensation. So, additional M&As are unlikely within the close to time period till leverage comes all the way down to administration’s focused 1.1x to 2.7x vary.

Long run, administration is planning to extend the corporate’s publicity to Meals and Pharma and Recycling markets. Together with FPM enterprise, these finish markets at the moment account for ~27% of the corporate’s income and the corporate considers these strategic progress markets the place it may put up a GDP+ progress fee. Nonetheless, I consider the corporate has to extend its gross sales from these markets meaningfully earlier than buyers begin appreciating this chance. With near-term M&A exercise paused on account of excessive leverage, I don’t see a lot to be enthusiastic about this enterprise in FY24 and would look ahead to order developments in legacy enterprise to enhance earlier than turning into extra optimistic on the corporate’s prospects.

Margin Evaluation and Outlook

In This autumn 2023, Hillenbrand’s margins benefitted from favorable pricing, productiveness enhancements, and decrease variable compensation. These optimistic components helped greater than offset the opposed influence of inflationary prices and decrease quantity within the Molding Know-how Options section. This resulted in an adjusted EBITDA margin enhance of 90 bps Y/Y to 19.3%. The Superior Course of Options section led the margin progress, which grew adjusted EBITDA margin by 190 bps Y/Y. In the meantime, the Molding Know-how Options section’s adjusted EBITDA margin declined 310 bps Y/Y as decrease quantity, price inflation, and unfavorable product combine outweighed the advantages from productiveness enhancements, decrease variable compensation, and favorable pricing.

Wanting ahead, within the close to time period, APS section margins needs to be negatively impacted by FPM acquisition as FPM has a decrease margin than APS enterprise. Within the MTS enterprise, the corporate is targeted on productiveness and managing prices however I consider quantity deleverage from a big decline in gross sales ought to offset their influence to a superb extent.

Nonetheless, within the medium to long run, as the corporate realizes synergy advantages from integrating the FPM enterprise and volumes finally get well, there needs to be some enchancment within the margins. So, the margin outlook is blended.

Valuation and Conclusion

The corporate is at the moment buying and selling at 11.97x FY24 consensus EPS estimates of $3.22 which is a reduction versus the corporate’s common ahead P/E of 12.84x during the last 5 years.

The corporate’s natural income needs to be negatively impacted within the close to time period on account of a decrease backlog, a slowdown within the Plastics and Chemical compounds finish market of the APS section, and a tender order surroundings for injection molding tools within the MTS section. There needs to be a pause in near-term M&A exercise as nicely on account of excessive leverage. The near-term margin outlook can also be unfavorable with the opposed influence of lower-margin FPM acquisition and quantity deleveraging from decrease gross sales offsetting the advantages from productiveness and value financial savings. Whereas the corporate could maintain some promise within the long-term given its concentrate on growing publicity towards meals and pharma and recycling finish markets, I consider it is prudent to attend on the sidelines until order developments enhance and web leverage comes all the way down to the focused ranges. Therefore, I’ve a impartial score on the inventory.