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Milacron Holdings Corp (NYSE:MCRN)
Q2 2019 Earnings Call
Jul 30, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the Milacron Holdings Corporation Fiscal 2019 Second Quarter Financial Results. [Operator Instructions].

It is now my pleasure to introduce your host, Andy Kitzmiller, Corporate Controller for Milacron. Thank you, Mr. Kitzmiller. You may begin.

Andy Kitzmiller -- Vice President of Finance and Corporate Controller

Good morning and thank you for joining us for our second 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 Investors 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'd 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 the presentation of these non-GAAP financial measures enhance the understanding of our performance. Reconciliations to comparable GAAP financial measures can be found in our earnings press release and are also available as part of the presentation materials posted on our website.

Finally, consistent with our first quarter 2019 call. The reported results that we will discuss on today's call will be from continuing operations as we moved our blow molding business to discontinued operations at the end of our first quarter 2019. With that, I'll turn the call over to Tom Gokey, President and Chief Executive Officer of Milacorn.

Tom Goeke -- President and 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 three. I'd like to walk everyone through the highlights of the previously announced merger with Hillenbrand. However, our discussion today will be limited to the details on this slide. We will not be taking any questions related to this transaction and we refer everyone to the presentation made by Hillenbrand on Friday, July 12, 2019, as well as the related SEC filings by both companies.

Our board carefully and thoroughly reviewed the strategic and financial merits of this combination and unanimously concluded that this transaction represents a unique opportunity for Milacron and provides our shareholders significant and immediate value. As well as the ability to participate in the upside potential of the combination. As part of the combination, Milacron shareholders will receive $11.80 in cash and a fixed exchange ratio of 0.1612 shares of Hillenbrand common stock for each share of Milacron common stock they own.

In Hillenbrand, we believe we have found a tremendous partner. Our goal at Milacron has always been to provide our customers with innovative products across our critical plastics and fluids technologies. Together with Hillenbrand, we will be able to continue delivering breakthrough products and customized systems to existing and new customers and strengthen our service platforms and distribution capabilities. Further, the Hillenbrand operating model is highly complementary to our approach. And we are confident, we can seamlessly bring these two companies together. We are confident we can create even more value for our key stakeholders together in this exciting new chapter. I hope you share our enthusiasm about the many benefits we expect from this transaction.

Moving to page four. Our second quarter 2019 results are in line with our expectations with sequential improvements in net sales, adjusted EBITDA and adjusted EBITDA margin. The second quarter 2018 was a record quarter for Milacron, creating a tough year-over-year comp. As previously discussed, 2018 was best characterized as a tale of two halves, with very solid growth in the global economy during the first half of the year and the introduction of policy generated headwinds in the second half that have carried into 2019. We are pleased with the sequential improvements during Q2 2019 and are optimistic that the second half of 2019 will be in line with our expectations.

Regionally, orders in China in Q2 2019 increased in all three of our business segments, up 16% from Q1 '19 and up 9% from Q4 '18. We see strong activity in our Asia sales pipeline and we are ready to meet customer demand as more projects are released. Within our MDCS segment, Mold-Masters saw increases in orders from Q1 '19 and Q4 '18 in nearly all of our end markets with increases in electronics, medical and packaging being the most significant.

Additionally, our APPT backlog is at $145 million with exceptional orders for our mid tonnage products through the end of 2019, and we have strong activity in our sales pipeline for small tonnage products, as well in the aftermarket with retrofits and rebuilds. Both price and cost management were, again, very effective during Q2. Price continues to be stable year-over-year. Through SG&A, discretionary spend and direct labor reductions we have offset inflation and had additional savings in the quarter.

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 second quarter, before turning the call back over to Tom for his closing remarks. I will start on page six of the presentation. For the quarter, net sales were $271 million, an 11% reported and 8% constant currency and pro forma decrease. On the sales we generated 18.1% adjusted EBITDA margins or $49.1 million. Sequentially, net sales increased 9% and adjusted EBITDA margins improved 160 basis points. In net sales, geographically, we saw a very strong sequential improvement in both North America and China in the second quarter.

Form an end market perspective, packaging, construction and medical, all did well in the quarter, both versus prior year and sequentially. Automotive had mixed results throughout the company, but overall, was up 5% constant currency over Q2 '18 and remained flat sequentially.

Now let me walk you through our three segments, beginning on page seven with MDCS. MDCS's second quarter sales were down 16% and 13% on a constant currency basis, still primarily driven by China, which is down versus prior year, but up double digits sequentially. Automotive was strong, both versus prior year and sequentially with electronics up over 50% sequentially and over 30% versus Q4 2018.MDCS generated adjusted EBITDA of $29 million in the quarter, a 28.3% margin.

Turning to our fluids technology segment on page eight. Fluids second quarter sales were down 12% and 8% on a constant currency basis, primarily driven by timing of shipments in Europe due to raw material availability. Europe is carrying a $1.19 million backlog that will convert to shipments early in Q3. Despite these challenges, sales showed modest growth sequentially in North America and China. Fluids generated adjusted EBITDA of $6 million in the quarter, a 21.6% margin.

Lastly, our APPT segment results are on page nine. Sales were $138 million in the second quarter, constant currency revenue growth was negative 4%, but we had 1% sales growth on a pro forma basis. As a reminder, we shut down our European injection molding facility in Q4 of 2018, which had approximately $10 million of sales in Q2 of the prior year. Additionally, Milacrons' management and Board of Directors have made the decision to divest blow molding business during Q1 of 2019, which has been classified as discontinued operations. North America continues to trend well with 30% sequential growth and 2% versus the prior year. Adjusted EBITDA was $20 million or 14.3% of sales in the quarter, a 110 basis point improvement over the prior year and a 100 basis point improvement year-to-date. The team is diligently marching toward the 15% full year margin goal for APPT.

I'd like now to discuss cash flow performance on page 10. The second quarter cash flow was $1.5 million and was the result of working capital timing and deal related cost. As mentioned in our Q1 2019 earnings call, we had an $8 million cash use related to our purchase of a Mold-Masters production facility in Baden-Baden in Germany that we previously leased. Our intention is to resell and leaseback this facility during Q3 of 2019. We closed on the sale of our blow molding business and collected approximately $52 million of proceeds on July 1, which were used to reduce the company's debt and further strengthen the balance sheet.

With regard to our 2019 guidance. As a reminder, we based our 2019 annual guidance on the assumption that the policy induced trade headwind subside midyear 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.

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

Tom Goeke -- President and Chief Executive Officer

Thank you, Bruce. As a wrap up on page 11, I would like to reiterate. Our Q2 results were consistent with our expectations and the first half of 2019 has progressed as anticipated. We had 9% sequential sales growth over Q1 2019, we had double-digit sales and order growth in China at the Milacron level and within our MDCS segment. We accomplished EBITDA margins of 18.1% with a 100 basis point improvement in APPT year-over-year. The sale of blow molding closed on July 1, 2019 as anticipated and proceeds were used to pay down $52 million in debt on July 3. Through today's call, we have repaid $57 million of debt in 2019. We are on track to meet 2019 guidance.

Thank you for joining us for this call. And with that, we can now move to Q&A. As a reminder, we will only answer question specific to our quarterly performance and financial outlook for 2019.

Questions and Answers:

Operator

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Your first question comes from Mike Halloran at Robert W Baird & Co. Please go ahead.

Michael Halloran -- Robert W. Baird & Co -- Analyst

Hey. Good morning, everyone.

Andy Kitzmiller -- Vice President of Finance and Corporate Controller

Good morning, Mike.

Tom Goeke -- President and Chief Executive Officer

Hey, Mike.

Michael Halloran -- Robert W. Baird & Co -- Analyst

So the commentary certainly sounded positive on the call here with -- which would sounds like stabilizing trend sequentially, consistent with what you were thinking. Now I put that in the context of the orders, which were down a fair amount. Could you help reconcile those two? And I'm guessing, part of it is just the moving pieces with some of the portfolio moves. But, I certainly like to hear you reconcile those two data points?

Tom Goeke -- President and Chief Executive Officer

Sure. Thanks, Mike. So largely the two issues that we see on the order side is timing, within APPT, both in India and in North America. The aftermarket is strong globally, sequential growth. Mold-Masters, all regions, all product lines in order. And then I would say in fluids where we have, let's say, as Bruce mentioned, we had a bit of hold back because of material shortage, but on the flip side, I would say, other regions performing well, Europe bit behind in fluids. So largely on the order side it's timing in APPT in North America and India. India is really a result of the elections, but we have a super pipeline both in equipment and also in retrofit. So we feel good about the forecast forward and guidance, but we do see that's where it is in the figures.

Michael Halloran -- Robert W. Baird & Co -- Analyst

And then just to put context on China here. It sounds like the trend line is sequentially improving each over the last couple of quarters. Maybe just talk about -- a little bit about, what the environment feels like? What customers are saying to you in confidence that that's sustainable?

Tom Goeke -- President and Chief Executive Officer

Well, it's definitely tough, right? We're slugging it out and part of it is winning new customers, part of it is new product development launch and then the balance is recurring business. So, what feels good about it is, the team is really loving to continue to pursue, the orders has been successful to date, margins have stabilized and improved. So from all the input from the team, it feels really good. Like I said though, we're chasing orders. It's -- I don't see it as a recovery. I see it as being in best position to win, but incrementally, it's a bit better.

Michael Halloran -- Robert W. Baird & Co -- Analyst

Makes sense. Last one from my side. Revenue was a little bit below what we we're expecting, but the margins were really healthy. Maybe just talk a little bit about some of the drivers that drove the strong margin performance here? And then a few comment on just sustainability form where we are today?

Tom Goeke -- President and Chief Executive Officer

Sure. So on the top line, it was bit of a slip on customer side in APPT, in North America on shipments. And about -- I think that's $1 million to $2 million also in India, same thing was because of our payment schedule delayed until Q3. So no loss of orders, just a [Indecipherable] off into our Q3, and customer driven. On the margin side, it feels really good, and largely because of cost out, cost management and really doing a fair job of offsetting the tariff impact. So the team has done really well. That part is absolutely sustainable and we've had very good margin recovery and a little bit of the impact on margin comes from NPE in prior year.

Michael Halloran -- Robert W. Baird & Co -- Analyst

That improved both. Thanks for the color there. It's good to see the progress. Congratulations on a solid quarter.

Tom Goeke -- President and Chief Executive Officer

Thanks, Mike.

Operator

Thank you. Your next question comes from Ken Newman at KeyBanc Capital Markets. Please go ahead.

Kenneth Newman -- KeyBanc Capital Markets -- Analyst

Hey, good morning, guys. Just wanted to start off with the free cash flow. And Bruce, I just wanted to clarify, it sounds like you are reiterating the 2019 guidance from last quarter. Free cash flow was a little bit weaker in the quarter than anticipated, but is it still right to model about $90 million $100 million target?

Bruce Chalmers -- Chief Financial Officer

Correct. We're on track. If you take a look at where we are, it's a little bit of a timing and working capital, but we're running at about 24% working capital as a percent of sales. We know we can get that back to 20% at the end of the year. It's just the timing of inventory flow, inventory build for shipments later in the year. So we're tracking well to hit that guidance and have no problem reiterating and reaffirming that number.

Kenneth Newman -- KeyBanc Capital Markets -- Analyst

Got it. And then, as a follow-up to that, just trying to think about capacity, how you see manufacturing capacity for the company today and the needs for going forward. Do you foresee any kind of large capital expenditure in the future to kind of help you grow [Indecipherable] new capacity that you might need? Or do you feel that with all the uncertainty in the market today that you might have to hold off on any kind of growth expenditures?

Tom Goeke -- President and Chief Executive Officer

Well, based on -- It's Tom. Good morning. So coming out of ' 18, and especially if you look back to the first half of the year, that's sort of the capacity in the business, which is significantly different than sales in Q4 -- I'm sorry, in Q1 and Q2. So just from a capacity point of view within the company, it's healthy. In terms of capital investment where we focused presently and into this year will be in two areas. One is, where we can invest in certain aged equipment to get productivity and, let's say, automation. And then on existing processes, both in our Mold-Masters business and in machining and APPT, we're looking at automation and that really is advantageous. Since when we're -- at a period when we're in a very high utilization time, we really can't even take the time to take equipment down, even doing the automation or to take aged equipment now to put automated equipment in. So we'll take advantage of some of that, which is, I would say, a modest investment, certainly not at the level of capital that we spent in prior year. So a modest investment in 2019 for -- as I've said, some updates and automation.

Kenneth Newman -- KeyBanc Capital Markets -- Analyst

That's helpful. One last one from me. It was helpful to hear some of the commentary on the orders through the quarter. I'm just curious, have the order inquiries been just as strong or maintaining that trend throughout July. And just try and help us think about what you're expecting for order cadence into the back half, understanding that you're still expecting a stronger second half relative to the first half

Tom Goeke -- President and Chief Executive Officer

It's been pretty much consistent -- excuse me -- and I would say that the pipeline is really solid. There is a couple of large orders sitting for us and that's not only in new equipment and Mold-Masters, but also, as I mentioned, in retrofit and rebuild. So the pipeline is solid.

Kenneth Newman -- KeyBanc Capital Markets -- Analyst

Thanks.

Operator

Thank you. There are no further questions at this time. I would like to turn the floor back over to Tom Gokey for closing comments.

Tom Goeke -- President and Chief Executive Officer

I'd like to thank all of you for joining our Q2 call. And we look forward to catching up in our Q3. Thank you. Bye now.

Duration: 22 minutes

Call participants:

Andy Kitzmiller -- Vice President of Finance and Corporate Controller

Tom Goeke -- President and Chief Executive Officer

Bruce Chalmers -- Chief Financial Officer

Michael Halloran -- Robert W. Baird & Co -- Analyst

Kenneth Newman -- KeyBanc Capital Markets -- Analyst

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