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Milacron Holdings (NYSE:MCRN)
Q1 2019 Earnings Conference Call
April 30, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, welcome to the Milacron's Fiscal 2019 First Quarter Financial Results. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) Please note this conference is being recorded. It is now my pleasure to introduce your host Andy Kitzmiller, Corporate Controller for Milacron. Thank you, you may begin.

Andrew Kitzmiller -- Vice President of Finance & Corporate Controller

Good morning and thank you for joining us for our first quarter fiscal year 2019 earnings call. With me on today's call are Tom Goeke and Bruce Chalmers.

A copy of the earnings release that was distributed this morning can be found on our milacron.com website under the Investor section. We will also provide a link for the replay of this webcast.

During our call today, we will be referring to the earnings release supplemental slides, which are also posted on our website. I would like to remind everyone that today's discussion will contain certain forward-looking statements based on the business environment as we currently see it, and as such, does include certain risks and uncertainties. Please refer to our press release and our SEC filings for more information on specific risk factors that could cause our actual results to differ materially from the projections described in today's discussion.

Any forward-looking statements that we make on this call are based on assumptions as of today and we undergo no obligations to update these statements as a result of new information or future events.

Also, we will discuss certain non-GAAP measures on today's call, including pro forma net sales and pro forma new orders. The pro forma figures included within today's presentation exclude certain product lines which have been eliminated through restructuring plant closures or certain discontinued product lines.

We believe that presentation of these non-GAAP financial measures enhance the understanding of our performance. Reconciliations to comparable GAAP financials can be found in our earnings press release and are also available as part of the presentation materials posted on our website.

Finally, the reported results that we will discuss on today's call will be from continuing operations, and we will cover our decision to move our Blow Molding business to discontinued operations later in the call.

And with that, I'll turn the call over to Tom Goeke, President and Chief Executive Officer of Milacron.

Tom Goeke -- Chief Executive Officer

Thank you, Andy, and good morning. As Andy mentioned, we have a slide presentation on our website to accompany our earnings call and it includes additional details to the commentary presented this morning.

Starting on Page 3, our first quarter 2019 results are in line with our expectation and a result of our Q3 and Q4 2018 order rates. As we discussed on last quarter's call, 2018 was best characterized as a tale of two halves, with solid strength in the global economy during the first half of the year and the introduction of policy-generated headwinds in the second half. The impact of those headwinds on our order book in the second half of 2018, as mentioned earlier, are reflected in our sales for Q1 2019, and because of a strong first half in 2018, we have a tough year-over-year comp.

Q1 orders have improved sequentially from Q4 and we were optimistic that we were turning the corner. Orders for Q1, 2019 were up 7% sequentially over both Q3 and Q4, 2018. Sequentially, orders were up 15% in North America with particular strength in our APPT segment worldwide. Orders in our Melt Delivery & Control Systems and Fluid Segments were essentially flat.

Orders in Europe and Asia continued at similar rates to Q4. Our backlog increased to $227 million, a 14% improvement versus prior quarter. As I mentioned earlier, sales in Q1 reflected the Q3 and Q4 order rates. On a constant currency basis, India continued with impressive topline performance in Q1, achieving double-digit growth year-over-year.

Both price and cost management were very effective during Q1. Price was stable year-over-year. Through SG&A, discretionary spend and direct labor reduction on specific businesses, we offset inflation, had additional savings in the quarter.

Our regional performance trended similar to industry reports with Europe and China orders down versus the prior year and flat to Q4. U.S. sales and orders were down modestly versus prior year and orders were up substantially compared to Q4. Our end market order performance also reflects industry trends with strength in medical and job shops; flat with distributors; and down in electronics and packaging. Exceptional to industry reports was automotive for Milacron, which was ahead 6% year-over-year in constant currency and 11% sequentially.

Moving to Page 4, I'll now turn the call over to Bruce for a detailed review of our financial performance.

Bruce Chalmers -- Chief Financial Officer

Thank you, Tom, and good morning, everyone. I will walk you through our financial performance for the first quarter before turning the call back over to Tom for his closing remarks.

For the quarter, net sales were $249 million; a 14% reported, 10% constant currency, and 11% pro forma decrease. On these sales, we generated 16.5% adjusted EBITDA margins or $41 million. Geographically, we saw very strong performance in India in the first quarter, both sequentially and on a constant currency basis versus the prior year. From an end market perspective, medical and job shops did well in the quarter. Automotive had mixed results throughout the Company and electronics are flat sequentially.

Now, let me walk you through our three segments beginning on Page 5 with MDCS. MDCS' first quarter sales were down 14% and 10% on a constant currency basis, primarily driven by China which is down versus prior year but flat sequentially. Medical and packaging end markets held up well while other segments were down year-on-year.

MDCS generated adjusted EBITDA of $26 million in the quarter, a 25.8% margin. As a reminder, our strategy in this business is to always build capacity slightly ahead of demand to ensure that we capture market growth which can come in very profitable waves when customer's redesign and refresh their products.

Our latest capacity increase was resourced with subcontractors and direct labor which required significant overtime to meet some of this market growth which peaked in Q2 of 2018. In parallel, we have been testing automation in order to improve our flexibility and cost effectively modulating capacity to meet demand while continually migrating production to our most competitive manufacturing location in China.

Turning to our Fluid Technology segment on Page 6, Fluid's first quarter sales were down 8% and 4% on a constant currency basis, primarily driven by some year-on-year softness in Asia. Sequentially, first quarter sales were down 6% with North America up 2%. Fluids generated adjusted EBITDA of $6 million in the quarter, a 21.8% margin.

As a reminder, our strategy in this business is to continue to innovate our synthetic and semi synthetic metalworking formulations in order to provide superior performance, while providing the lowest total cost to our customers who are operating in an environment that often requires using higher performance materials while complying with stricter environmental regulations. We have a pipeline of new innovation to serve our customers from our production facilities in Asia, Europe and North America.

Lastly, our APPT segment results are on Page 7. Sales were $119 million in the first quarter. Constant currency revenue growth was negative 12% and 9% on a pro forma basis. As a reminder, we shut down our European injection molding facility in Q4 of 2018, which had approximately $9 million of sales in Q1 of the prior year.

Additionally, Milacron's management and Board of Directors have made the decision to divest the Blow Molding business, which is now classified as discontinued operations. Our India business continues to perform well with double-digit revenue growth year-on-year.

Adjusted EBITDA was $15 million in the quarter. On a percentage basis, our aforementioned portfolio changes drove a mix of products with stronger margins. For the quarter, margins were 12.3%, an 80 basis point increase over prior year. We continue to work through several continuous improvement initiatives to ensure that we reach our next milestone of 15%-plus margins on a full-year basis.

Our APPT strategy has two primary pillars in order to simultaneously drive growth and margin expansion. First, we will continue to build out our engineering and manufacturing capabilities in India where we already have a leading platform. Migrating more of our global production to India will improve our equipment margins and free up more of our North American resources for aftermarket where we have a large installed base.

Secondly, we will continue to build out our aftermarket capabilities including availability of well-trained field service technicians, rapid availability of spare parts and cost effective upgrade packages to maintain the performance of each machine in our installed base to world class standards across their 20-plus year life.

As we are continually refining our strategic focus, we have decided to exit the Blow Molding business which is in our APPT segment. Working with our Board of Directors, we determined it is in the best interest of Milacron and our shareholders to focus our APPT strategy on the injection and extrusion businesses, which are better aligned with our financial objectives of achieving consistent 5% top line growth and 20% EBITDA margins.

I'd like now to discuss cash flow performance on Page 8. For the first quarter, cash flow was negative $22 million and was the result of three large cash uses, two of which will reverse in subsequent quarters and the other which was one-time in nature. The first was approximately $8 million related to our purchase of a Mold-Masters production facility in Baden-Baden Germany that was previously leased. Our intention is to resell and lease back this facility in 2019.

The second item relates to the final severance payments totaling approximately $8 million we made in Q1 to close out the multi-year European restructuring. The third use was for working capital with the majority related to normal inventory build for shipments in subsequent quarters in APPT where we had very strong orders during the quarter. During the first quarter, we also allocated $5 million for a payment on our term-loan and repurchased $3.7 million of our stock under a 10b5-1 plan.

With regard to our 2019 guidance, as a reminder, we based our 2019 annual guidance on the assumption that the policy-induced trade headwinds subside mid-year and create a dynamic that is the opposite of FY '18 with some sequential weakness in the first half and a stronger second half.

Thus far, we are tracking with these expectations and remain attentive to the inflection points underpinning our forecast for the remainder of the year. Disposition of our Blow Molding business is not expected to materially impact our guidance with the exception of free cash flow, which will be $10 million lower.

I'll now turn the call back over to Tom for his closing remarks.

Tom Goeke -- Chief Executive Officer

Thank you, Bruce. As we wrap up on Page 9, I would like to reiterate, our Q1 results were consistent with our expectations in the first half of 2019 is progressing as anticipated. The order book is turning the corner as Q1 orders were up 7% sequentially from Q3 and Q4, 2018. The markets are still working their way through the residual effects of policy-induced headwinds all Milacron businesses are healthy and secular trends remain unchanged. Our guidance range for growth and margin in 2019 remain unchanged.

Thank you for joining us for this call. And with, that we can now move to Q&A.

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question is from Ken Newman with KeyBanc Capital Markets, please proceed.

Tom Goeke -- Chief Executive Officer

HI Ken.

Ken Newman -- KeyBanc Capital Markets Inc. -- Analyst

So -- good morning, just first question on China, can you just give a little bit more color in terms of what you're seeing in terms of the order environment in that region? Obviously, you saw a pretty nice sequential uptick within the region, and just given how well the profitability in that business came in during the quarter, maybe just some color on the cadence that you expect out of MDCS, as we kind of look at or put it into reference with your back-half-weighted guidance?

Bruce Chalmers -- Chief Financial Officer

Sure. It followed in Q1 very similar, regarding orders, to Q4. I would say the sequential and I would say the -- in our equipment business, I know your question is about Melt Delivery, I'll come right back to it. We had, I'd been really quiet in Q3 and Q4 relative to RFP, RFQ. And in Q1, actually we got, I would say a robust number of inquiries in terms of people building out capacity which is a distinct change from end of last year. And in the Melt Delivery business is topics, projects that are being initiated but not closed. So I would say, we feel optimistic on sort of trending we don't see it in the order book yet, but it feels like, toward the end of Q2 and into the beginning of Q3 it just feels positive, relative to the projects being discussed with larger customers and multinationals.

Ken Newman -- KeyBanc Capital Markets Inc. -- Analyst

So with that being said, would you expect that and I'm looking at MDCS specifically here, because it was a drag in the fourth quarter. Would you expect 1Q '19 to be the low point for profitability in the MDCS segment then going forward.

Bruce Chalmers -- Chief Financial Officer

Yeah, I really think it's -- Q4 is probably the real low of what we've seen in some of the underlying businesses there. And we can see some trajectory in the opposite direction although slow, some better improvement in the margin profile of what's coming through in the underlying order book in Q1 versus Q4.

Ken Newman -- KeyBanc Capital Markets Inc. -- Analyst

And, I just wanted to clarify the maintain sales guide while moving the $90 million in Blow Molding sales to discontinued ops. That's -- that's also assuming the discontinued ops in the prior year, correct?

Bruce Chalmers -- Chief Financial Officer

Correct.

Tom Goeke -- Chief Executive Officer

That's right.

Bruce Chalmers -- Chief Financial Officer

Yeah. And in the deck, if you go through the deck, we've included all the data points, so you can triangulate how to do the math on the guidance. We guided to rate (ph) growth rate and EBITDA margin and if you back out the 2018 Blow Molding numbers from the base, you can run those -- use those same growth rates and EBITDA margins to calculate the guidance with the impact of Blow Molding coming out of the business. If you have any questions about that, please just reach out to us.

Ken Newman -- KeyBanc Capital Markets Inc. -- Analyst

Yes, one last one and I'll jump back into you. I wanted to just touch on the free cash flow guidance and I know that you had mentioned that there were a couple of one-time costs there with related to some CapEx that you made as well as some working capital build. Is the new guidance, purely reflective of just the costs that you've incurred in the first quarter or do you expect any other projects to kind of creep into the embedded free cash flow guidance for the rest of the year?

Bruce Chalmers -- Chief Financial Officer

Yeah it's -- so if you take our original guidance and really just back out the $10 million for Blow Molding, that gets you to the updated cash flow guidance. Everything else was either already baked into the guidance or will reverse in subsequent quarters.

Ken Newman -- KeyBanc Capital Markets Inc. -- Analyst

Perfect Thanks.

Bruce Chalmers -- Chief Financial Officer

Yeah, just as an -- as an example just the sale leaseback is just, it's $8 million out in Q1 and when we complete the second part of that transaction, that cash will come back into the Company.

Operator

(Operator Instruction) Okay, we have reached the end of our question-and-answer session. I will now turn the call over to Andy Kitzmiller for closing remarks.

Andrew Kitzmiller -- Vice President of Finance & Corporate Controller

So, thank you everybody for joining our Q1, 2019 earnings call and we look forward to catching up with you next quarter.

Operator

Thank you. This concludes today's conference. You may disconnect your lines at this time and thank you for your participation.

Duration: 20 minutes

Call participants:

Andrew Kitzmiller -- Vice President of Finance & Corporate Controller

Tom Goeke -- Chief Executive Officer

Bruce Chalmers -- Chief Financial Officer

Ken Newman -- KeyBanc Capital Markets Inc. -- Analyst

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