Hillenbrand Inc (HI) Q1 2021 Earnings Call Transcript

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Hillenbrand Inc (HI 2.29%)
Q1 2021 Earnings Call
Feb 4, 2021, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the Hillenbrand Q1 Fiscal Year 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host Kaveh Bakhtiari, Senior Director of Investor Relations. Please go ahead.

Kaveh Bakhtiari -- Senior Director of Investor Relations

Thank you. Good morning everyone and welcome to Hillenbrand's first quarter fiscal 2021 conference call. I'm joined by our President and CEO, Joe Raver; and our Senior Vice President and CFO, Kristina Cerniglia.

I want to direct your attention to the supplemental slides posted on our IR website that will be referenced on today's call. Turning to Slide 3, a friendly 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. Also during the course of this call, we will be discussing certain non-GAAP operating performance measures including pro forma comparisons for our business. I encourage you to review Slide 3 of the presentation and our 10-Q, which can be found on our website for a deeper discussion of forward-looking statements and the risk factors that could impact our actual results.

With that, I'll turn the call over to Joe.

Joe Raver -- President & Chief Executive Officer

Thank you, Kaveh and good morning everyone. Thanks for joining us today and we hope you and your families are safe and well. I'd like to begin by acknowledging the continued dedication of Hillenbrand's employees in managing the business through the COVID-19 pandemic. We remain vigilant in our commitment to ensure the health and well-being of our employees and their families, to meet the needs of our customers, and to execute strategic initiatives that we believe will position Hillenbrand well now and into the future.

This past quarter we marked the one-year anniversary for the close of Milacron acquisition. Over the past year, our teams have made rapid progress integrating the business and capturing synergies. We also continue to adapt successfully to the challenges brought about by COVID-19. We ended fiscal year 2020 in a strong position and in the first quarter of fiscal 2021, continued to build on that momentum, delivering strong results. Each segment exceeded our top line expectations in Batesville and the Molding Technology Solutions segment also achieved meaningful margin expansion by driving the benefit of higher volume to the bottom-line.

In addition to our solid operating performance in the quarter, we made significant progress against our previously announced plan to exit the Flow Control businesses, Red Valve and ABEL, and we remain on track with our plan to divest TerraSource Global. Overall, I'm pleased with our execution in the first quarter. And while uncertainty regarding the pandemic remains, we are focused on navigating the environment to drive profitable growth in our large platform businesses, capture the full benefits of the Milacron acquisition, and strategically deploy cash flow to drive long-term shareholder value.

Before I get into the highlights of the quarter, let me spend just a few minutes on the execution of our strategy as outlined on Slide 5. As we've consistently communicated, we are focused on executing four key strategic pillars as we work to build Hillenbrand into a world-class global industrial company. The first is to strengthen and build business platforms, both organically and through M&A. The Milacron acquisition represented a major step in the execution of the strategic pillar.

With Milacron, we added industry-leading and complementary hot runner and injection molding product lines to the Hillenbrand portfolio, further strengthening our customer offering, increasing our global scale, and enhancing our capabilities across the entire plastics value chain from base resin production all the way through recycling. Given that we have materially improved our balance sheet over the past year, we expect to continue to increase growth investments, both organically and inorganically with a focus on strengthening and building our large business platforms in APS and MTS.

Our second strategic pillar is to manage Batesville for cash. Batesville has a long history of manufacturing excellence in burial caskets with solid and predictable cash flow that we can invest to grow our industrial platforms. Batesville's outstanding cash flow over the past several quarters, which we used to pay down debt, underscores the important role Batesville plays in our portfolio. The third pillar of our strategy is to build a scalable foundation for growth using the Hillenbrand operating model. The acquisition of Milacron is providing a unique opportunity for us to transform and scale many of our shares back-office functional business processes in areas such as IT, HR, health and welfare benefits and finance.

We believe that our efforts, to standardize processes and services and to leverage best practices across our operating companies globally, will drive meaningful efficiencies, improve effectiveness and quality and provide a scalable foundation for future growth. We're also driving efficiencies and best practices in operations by leveraging our combined spend through the Global Supply Management Group and driving lean business practices, which really are the core of the Hillenbrand operating model to improve safety, quality, delivery, cost and working capital.

Our fourth and final pillar is to effectively deploy strong free cash flow. We have a track record of maintaining a flexible balance sheet, so we can grow through strategic acquisitions and a history of quickly reducing leverage following acquisitions. This past quarter, we reduced our leverage ratio by approximately 0.5 turn to 2.2 times net debt-to-EBITDA. We are confident in our ability to continue to generate robust free cash flow, maintain a strong balance sheet and grow our company, both organically and inorganically while returning capital to shareholders. Today, given our current leverage, we are lifting the temporary suspension of our share repurchase program and we will resume consideration of strategic bolt-on acquisitions. As always, we will remain disciplined in our approach to deploying cash.

Now, let me turn to some highlights for the quarter. Total company performance exceeded our expectations led by higher burial casket demand at Batesville associated with the COVID-19 pandemic and strong hot runner systems growth in the MTS segment, driven by medical and packaging demand. Additionally, we drove productivity and synergies across all of our segments. The 30% growth at Batesville in the quarter was well above our expectations. While this significant increase in burial casket demand is both unfortunate and unprecedented, we were well positioned to handle this increase in volume at Batesville.

And the results for the quarter reflect that. Over the past few years, the team has made significant progress in simplifying operations, reducing costs and improving the supply chain. And that was evident in the way Batesville responded to the spike in demand and drove the benefits of operating leverage to the bottom line.

Before I move to the other segments, I would like to take a moment to express my sincere thanks to our funeral home customers and their staffs, who have worked tirelessly and heroically to serve their communities during this terrible pandemic. I'd also like to thank the Batesville employees, who have worked incredibly hard and who have made personal sacrifices to deliver on our commitments to our customers. The mental and physical challenges associated with the pandemic over the past year have been significant, and I continue to be proud of the Batesville team for their resilience and their ability to execute at a high level in such a demanding environment. This is a company that is truly living its mission of helping families honor the lives of those they love.

In the Advanced Process Solutions segment, sales came in higher than we expected when we spoke to you last quarter. This is despite lower year-over-year revenue due to continued delays on specific large polyolefin projects in our backlog. The large project delays in the quarter were partly offset by faster delivery for smaller and mid-sized equipment. We've had no cancellations of large projects from our backlog and demand for this type of project continues to be strong overall, particularly in China, which is offsetting lower North American demand for large polyolefin projects. The strength we saw in the food and pharmaceutical end markets at the end of fiscal 2020, continued into the first quarter of this year. Other industrial end markets continue to remain challenged.

In Molding Technology Solutions, sales and margins were strong with hot runner system sales up in all regions and injection molding strength in India. We saw an uptick in several end markets, including medical packaging, consumer goods and electronics. Sales within automotive were up modestly sequentially, but continued to be soft compared to historical levels. Parts and service revenues were lower compared to the prior year. Our MTS backlog increased 100% year-over-year on a pro forma basis, driven primarily by continued strength in orders for injection molding equipment.

Total company backlog increased over 32% year-over-year on a pro forma basis, to a new record of $1.4 billion a real sign of continued strong demand for our highly engineered solutions and applications expertise. We continue to take the appropriate steps to convert our backlog to revenue, while following all necessary COVID-19 safety protocols and managing customer-induced schedule changes. Overall, I believe we executed well in the quarter and the businesses are well positioned for the future.

Before I turn the call over to Kristina for additional detail in the quarter, I want to spend a few minutes to discuss our sustainability efforts. As some of you may have seen in our recently released annual report, sustainability is an important topic and one that we've been working on for a number of years at Hillenbrand.

In 2018, we took a big step forward in our efforts by forming a cross-functional sustainability steering committee, that's been effective in guiding our actions in a more coordinated way across the entire enterprise. In 2019, we conducted a materiality assessment to identify the sustainability-related topics most important to our stakeholders, including employees, customers and investors. In that same year, we also signed on to the United Nations Global Compact, because we believe that incorporating sustainability in our business activities will improve all aspects of our company, including the impact we have on society and the environment. And in the summer of 2020, we issued our first sustainability report, which shares some of the activities that we've undertaken.

One particularly impactful program is our global community engagement initiative that we call the One Campaign. In the past years, the Hillenbrand One Campaign has focused on the UN Sustainable Development Goals, or SDGs, of quality education, reduced inequalities with a focus on diversity and inclusion and responsible consumption and production. Leveraging the results of our recent materiality assessment has been instrumental in identifying the SDGs most important to our stakeholders and focusing our efforts in areas that can have the greatest impact to our company and society.

In 2021, the One Campaign is focused on the SDG good health and well-being. In fact, currently, a number of our employees are volunteering to support a vaccination clinic in our local Batesville community. Given the impact of the COVID-19 pandemic in the communities in which we operate and across the nation and world, this is an initiative we feel strongly about lending our time and talents too.

So with that, I'll turn the call over to Kristina to provide more specific details on our overall financial performance, segment performance and outlook.

Kristina Cerniglia -- Senior Vice President & Chief Financial Officer

Thanks, Joe, and good morning, everyone. Throughout my section, I will be referencing pro forma results which exclude Red Valve in the APS segment and the Cimcool business which was divested on March 30, 2020, in the MTS segment. It also assumes the Milacron acquisition closed on October 1, 2019. We believe these pro forma results provide a better comparison of our ongoing operations and you will find a comparison of as-reported and pro forma results on Slide 19 of the earnings slide deck.

Turning to the quarter, our teams sustained their strong momentum, with continued revenue growth, significant margin expansion and solid free cash flow. We finished the quarter with results that were better than we anticipated, particularly given uncertainties caused by the pandemic. We delivered total revenue of $693 million, an increase of 22%. Excluding the impact of foreign exchange, total revenue increased 19%. On a pro forma basis revenue increased 6%, driven by strong burial casket demand at Batesville and hot runner systems sales in MTS.

Adjusted EBITDA of $138 million increased 50% and adjusted EBITDA margin of 19.9%, increased 370 basis points. On a pro forma basis adjusted EBITDA of $137 million, increased 51% and adjusted EBITDA margin was 20%. With the benefit of additional volume along with the actions, we've taken to contain costs across all segments we expanded our adjusted EBITDA margin, 600 basis points over the prior year on a pro forma basis. We reported GAAP net income of $76 million or $1.01 per share, an increase of $1.06 over prior year, primarily driven by a decrease in acquisition and integration costs related to Milacron, the gain on the sale of Red Valve and higher volume within Batesville. Adjusted net income of $72 million resulted in adjusted earnings per share of $0.96, an increase of 28%, mainly driven by strong Batesville and MTS performance.

The adjusted effective tax rate for the quarter was 28.5%, an increase of 650 basis points from the prior year. The increase is primarily due to the prior year tax benefit recognized for the reduction in India's statutory tax rate. And, an increase in the deferred taxes associated with foreign un-remitted earnings this quarter. Hillenbrand generated cash flow from operations of $66 million, an increase of $48 million compared to the prior year. This increase was primarily due to lower acquisition and integration costs associated with Milacron and the strong cash generated by MTS from advanced payments on strong orders.

Capital expenditures were approximately $6 million in the quarter, slightly lower than anticipated. We also paid down $157 million of debt and returned $16 million to our shareholders, in the form of cash dividends. We recognized $6 million of incremental synergies in the quarter. And we expect to deliver $20 million to $25 million of synergies this year. We remain on track to achieve the three-year $75 million total run rate synergies, related to the Milacron acquisition.

Moving to segment performance Batesville's revenue of $165 million, increased 30% year-over-year, driven by higher volume, as a result of increased deaths associated with COVID-19 and higher average selling price, partially offset by an estimated increase in the rate at which families opted for cremation. With the commitment of our Batesville employees, our manufacturing capabilities and distribution footprint, we were able to respond to the elevated volume to meet our customers' needs. Batesville's first quarter execution was outstanding. And the benefits of the Hillenbrand operating model are evident in the results.

Strong operating leverage and productivity initiatives, contributed to exceptional margin performance. Adjusted EBITDA margin of 31.7%, improved 1,360 basis points over the prior year and more than offset inflation in the quarter.

Turning to Advanced Process Solutions, APS revenue of $291 million decreased 5%. On a pro forma basis, revenue of $283 million also decreased 5%. Excluding the impact of currency, revenue decreased to 9%. The revenue decline was primarily driven by a decrease in large polyolefin system sales, due to customer-driven delays on certain projects, and lower parts and service revenue driven by delays associated with the COVID-19 pandemic. We continue to see field service and aftermarket softness exacerbated, by COVID-19 travel restrictions. But the aftermarket business has begun to stabilize, and we've continued to innovate to provide service remotely.

Longer term, we continue to see opportunity for growth in this area, as the installed base for our large systems, continues to grow. Adjusted EBITDA margin of 16.7% was down 10 basis points, and down 30 basis points on a pro forma basis. The decrease was due to lower volume and adverse mix from a couple of lower margin strategically important plastics projects, partly offset by cost containment actions and productivity improvements.

Order backlog excluding Red Valve reached a new record high of $1.1 billion at the end of the first quarter, an increase of 21% year-over-year on a pro forma basis. Excluding the impact of foreign currency exchange, backlog increased to 12%. Sequentially backlog increased to 10% on a pro forma basis from the previous record high. We continue to see solid demand in the pipeline for new large plastics projects during the quarter primarily from Asia. These projects are expected to contribute to revenue over the next several quarters including about 28% of the backlog expected to convert to revenue beyond the next 12 months.

MTS revenue of $237 million increased 78% and 7% on a pro forma basis in comparison to the prior year. Excluding the impact of foreign exchange, revenue increased 5%. Sales of hot runner systems increased double digits on continued solid demand in medical and packaging end markets and sales of injection molding and extrusion equipment were roughly flat year-over-year, but improved 20% on a sequential basis. India in particular continues to rebound on strong demand across all end markets particularly medical and consumer goods.

Adjusted EBITDA of $48 million increased 84% and 47% on a pro forma basis with adjusted EBITDA margin of 20.4% increasing 560 basis points compared to the prior year on a pro forma basis. The improvement was driven by higher volume, productivity initiatives including cost synergies and favorable mix of higher margin hot runner systems. We're encouraged with these results and remain focused on leveraging the Hillenbrand operating model to drive sustainable operational improvements.

Order backlog of $292 million increased 100% compared to the prior year on a pro forma basis and 20% sequentially, primarily driven by an increase in injection molding equipment orders. Activity was strongest in the medical, consumer goods, packaging and electronics end markets. We saw a slight uptick in automotive orders in the quarter and remain cautiously optimistic about future demand.

Turning to the balance sheet; net debt at the end of the quarter was $1.1 billion and the net debt to adjusted EBITDA ratio fell by half a turn sequentially to 2.2 times. As of the quarter end, we had liquidity of approximately $1.1 billion including $266 million in cash on hand and the remainder available under our revolver. In the quarter, cash proceeds from the sale of Red Valve were $59 million. We paid down $157 million of debt including prepayment of our term loan due in 2022 with cash on hand and revolver borrowings. We have no near-term debt maturities and we'll continue to leverage the Hillenbrand operating model to drive greater efficiency across the business. We continue to focus our efforts on improving working capital efficiencies particularly in the MTS segment.

Turning to capital deployment, we are pleased with our aggressive deleveraging progress, which gives the company greater flexibility to grow both organically and inorganically. While our focus will still be to pay down debt, we are now more comfortably within our leverage guardrails. We will continue to focus on reinvesting in the business with strategic investments and high-return opportunities. And as Joe mentioned earlier, we will reinstate our share repurchase program as well as begin to consider strategic bolt-on acquisitions.

Let me conclude my prepared remarks with our near-term outlook, which includes ABEL. Amid continued uncertainty we are providing guidance only for the second quarter of fiscal 2021 under the assumption that we'll continue to see gradual stability in the global economy without any new broad-based COVID related disruptions. We expect Hillenbrand's total second quarter revenue to increase year-over-year in a range of 12% to 16%. We expect adjusted EBITDA in the range of $126 million to $137 million and adjusted earnings per share in the range of $0.85 to $0.95 for the second quarter, an increase of 29% on a year-over-year basis at the midpoint of the range.

Starting with Batesville; in the second quarter, we expect revenue to increase 20% to 25% year-over-year based on a continued trend of elevated burial casket volumes due to the pandemic. We expect strong margin performance in the second quarter, driven by operating leverage and continued efforts to drive productivity. However, we are experiencing higher commodity inflation and transportation cost, including premiums paid to expedite shipments. We're targeting adjusted EBITDA margin of 29% to 30%, an increase of 590 to 690 basis points over the prior year.

In Advanced Process Solutions, which includes mid and long-cycle capital systems equipment and aftermarket parts and service, we expect second quarter revenue in a range of flat to down 4% year-over-year, primarily due to customer-driven delays with the timing of long-cycle, large polyolefin projects. Partly offsetting that is the demand momentum we have seen in a couple of areas for our mid-cycle capital equipment within plastics and food end markets and stabilization in parts and service. We expect adjusted EBITDA margin of 17.5% to 18% to be modestly lower from a year-over-year perspective, down 60 to 110 basis points, as the headwind from lower volume, project mix and certain targeted investments is partially offset by our continued cost containment and productivity initiatives.

Turning to Molding Technology Solutions, which includes mid-cycle injection molding equipment, short-cycle hot runner systems and aftermarket parts and service, we expect strong second quarter revenue growth in a range of 37% to 40% over prior year as demand continues to be strong in both hot runner and injection molding product lines. Last year, we had COVID-related shutdowns in China that we do not expect will repeat. We are targeting adjusted EBITDA margin of 18.8% to 19.2%, an improvement of about 320 to 360 basis points, as the benefit of higher volume and continued productivity improvements flow to the bottom line. On a sequential basis, margins will be lower than the first quarter due to a mix impact from higher injection molding sales, which typically carry a lower margin. Higher commodity inflation and transportation costs and targeted investments we are making to drive growth.

Now turning to our expectations for the full year. In terms of the outlook for the Batesville segment in the second half, we are not providing specific guidance, given the uncertainty that remains due to the pandemic. The impact of the newly identified strains of the coronavirus and the speed and effectiveness of the vaccination rollout continue to make longer-term demand for Batesville hard to predict.

In the second half of the year, we expect Batesville's revenue and margins to be lower on a year-over-year basis, due primarily to the impact of lower volume from fewer COVID-related deaths, along with higher commodity inflation. In the Advanced Process Solutions segment, we are expecting revenue to increase low single digits on a pro forma basis for the full year. We expect increased revenue in large plastics projects and stabilization of the aftermarket business during the second half of the fiscal year. We also expect EBITDA margins to be slightly down year-over-year on a pro forma basis, due to unfavorable project mix and investments in the business.

Turning to the Molding Technologies segment. For the year, we expect revenue to increase in the mid-teens year-over-year on a pro forma basis, driven by continued strength in end markets, such as medical, packaging and consumer goods and gradual improvement of automotive. We expect moderate EBITDA margin improvement year-over-year on a full year basis, as additional volume leverage and productivity are partially offset by unfavorable mix and inflation. We expect pressure on margins in the second half of the fiscal year versus prior year, due to unfavorable injection molding mix and additional investments in the business.

Overall for the portfolio, we recognize that there is still a high degree of volatility and uncertainty around the world. Having said that, our team has demonstrated the ability to execute through challenging circumstances, and I have confidence in our ability to achieve these results and continue our momentum.

And now, I'll turn the call back over to Joe.

Joe Raver -- President & Chief Executive Officer

Thanks, Kristina. Let me leave you with a few final takeaways before we open the call to your questions. We executed well and delivered strong performance across the board in the quarter. In particular, we achieved robust growth at Batesville an exceptional EBITDA margin in Batesville and MTS. The acquired Milacron businesses are beginning to accelerate their performance and we remain bullish on the deal's long-term strategic and financial benefits. We're on track to deliver $20 million to $25 million in year two synergies, and we remain confident in achieving year three run rate synergies of $75 million.

Continued strong free cash flow performance in the quarter has enabled us to delever at an accelerated pace despite the ongoing backdrop of the COVID-19 pandemic. We further focused our portfolio by divesting Red Valve and signing an agreement to divest ABEL. And finally, we ended the quarter with a record backlog and a robust project pipeline. We believe we will remain well positioned to overcome any near-term macro challenges and are confident in our strategy to drive profitable growth over the long-term.

With that, we'll open the line for your questions.

Questions and Answers:

Operator

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question today is from Daniel Moore of CJS Securities. Please proceed with your question.

Daniel Moore -- CJS Securities -- Analyst

Joe, Kristina good morning, thanks for taking the questions and the color. Maybe start with Advanced Process Solutions. You mentioned Asia. Just talk about where the incremental demand is coming from. Are you seeing a significant pickup at auto? Are there other end markets? And are you surprised at all just how resilient it's been?

Joe Raver -- President & Chief Executive Officer

Yeah, good morning, Dan. Thank you for the question. So regarding APS and where the strength is in orders and the quote pipeline, Asia is very strong. China is very strong right now. And really it's largely due to their continued expansion of capacity in the country. And so it's really a buildup capacity around base resins and engineered plastics and we continue to see that strength and that momentum. And again, I think that's just driven really by two things. One, their desire to be more self-sufficient in the production of plastics. And secondly, the economy there for local consumption is pretty strong. It's probably our strongest area of demand around the world.

Daniel Moore -- CJS Securities -- Analyst

Very helpful. And you gave pretty good -- very good color. But again, the margins at Batesville were just off the charts. So congrats to the team on the incrementals and the execution. Maybe just talk about the glide path toward normalization in the back half of the year beyond this quarter, which obviously will be strong. I know, it will be volume-dependent. But where do we settle back out once the dust has settled Kristina in terms of maybe a longer-term modelling on the Batesville side of the business?

Kristina Cerniglia -- Senior Vice President & Chief Financial Officer

Yeah. So obviously that's difficult, because a lot of this is volume. I can tell you from the -- looking at the back half, we are going to see inflation hit us particularly around steel and wood. And so we have experienced deflation in that area. So we're going to have inflation there. I think as we look to what normal is and I'm not sure what that is, the team has continued to take actions to focus on productivity, simplify their business, their operations. I think if we just kind of go back to our long-term, we believe EBITDA margin will be around that 20% to 21%. I think that's probably a good assumption to move forward with. Obviously that is when volume stabilizes. And so, if we see a significant drop in volume you can probably expect to see more pressure on the margins. But for the long-term, I think it's probably fair to think about that 20% to 21%.

Daniel Moore -- CJS Securities -- Analyst

Really helpful and maybe one more Molding Tech Solutions MTS, where -- remind us where is backlog now compared to where we were 8, 12 quarters ago before Milacron started to see some pressure in China. And how quickly does that backlog typically convert to revenue particularly on the injection molding side? Thank you.

Kristina Cerniglia -- Senior Vice President & Chief Financial Officer

Yes. So we have very strong backlog. Going back to 8 or so quarters, 8, 10 quarters it's probably the highest backlog. It is the highest backlog that we've seen in the business. And so when we think about the conversion of that backlog, it is going to convert on average between six to nine months. We have a couple of projects that are in there that are -- will go around 12 months. But on average it converts around six to nine months. I would say -- one another thing Dan, one other thing I would just say we do believe that as we look at this backlog there was pent-up demand. And so obviously we had a very strong quarter. So we expect probably backlog to come down a little bit as we go through the year, but nonetheless, very strong backlog position exit it.

Joe Raver -- President & Chief Executive Officer

Yes. But really all the business lines inside of MTS are in really good position with the backlog. It's not just one of the business lines that's driving that. It's really pretty good across both the hot runner business as well as injection molding business, strong on both sides.

Daniel Moore -- CJS Securities -- Analyst

All right. Well I have 100 more questions, but I will jump back in queue and maybe get a follow-up for two and thank you.

Joe Raver -- President & Chief Executive Officer

Thanks, Dan.

Operator

The next question is from Chris Howe of Barrington Research.

Chris Howe -- Barrington Research -- Analyst

Good morning Joe, Kristina and thank you for taking question.

Kristina Cerniglia -- Senior Vice President & Chief Financial Officer

Good morning.

Chris Howe -- Barrington Research -- Analyst

Good morning. Starting on the MTS segment you mentioned the outlook some second half pressure on margin versus last year due to a higher mix of injection molding. Perhaps you could talk about injection molding versus the other part of the business which has consistently shown very high adjusted EBITDA margins. Is there an opportunity in injection molding further down the road to improve those margins versus the other part of the business?

Joe Raver -- President & Chief Executive Officer

Yes so, I think you're exactly right. So the hot runner part of the business is a higher margin part of the business. And on the injection molding side, we're seeing strength in orders on injection molding side. It will be a larger percentage of revenue as we go into the second half of the year. And we do see opportunities particularly over the longer run to improve margins in that part of the business. And really that's driving good lean business practices in the Hillenbrand operating model through that business. And so we're very focused and working with that supply chain group to continue to drive process improvements that will improve both working capital, but also margins over the longer run. Kristina anything you want to add to that?

Kristina Cerniglia -- Senior Vice President & Chief Financial Officer

So Chris, I think just as a reminder when we think about the EBITDA margins between the -- essentially the hot runner business and the injection molding business there's a 15-point difference in EBITDA margin. And so that is why you're going to see pressure on the margins in the back half. And I agree with Joe, our focus throughout this integration is to ensure that we can deploy the Hillenbrand operating model to increase those margins in injection molding. Obviously it's going to take time. It's not going to get there overnight. We don't anticipate to close the entire gap with those product lines, but we certainly expect improved margins in injection molding.

Chris Howe -- Barrington Research -- Analyst

That's great. And a follow-up it's hard to ignore it. This uncertainty with the pandemic certainly has created some certainty to the upside for the Batesville segment tremendous leverage in the quarter normalizing at 21% to 22% you mentioned previously. Can you talk about the opportunity that this cash provides? Assuming these different strains and infections continue to rise, it's going to continue to generate not only stable, but increasing cash flow for the business combined to where you are on the balance sheet. Perhaps what I'm getting at is how do you view the strategic opportunity set in the market versus three months ago? And I envision the company could look much different in one to three years?

Joe Raver -- President & Chief Executive Officer

Yes. So I'll tell you, you're exactly right that the Batesville business has generated a tremendous amount of cash over the past, really now three quarters going into the fourth quarter of continuous strong demand due to the pandemic. Just related to the pandemic, it's very hard to predict what the future looks like. We do expect the number of deaths to start to drop. In fact, we think we've sort of reached peak and we'll see the number of deaths start to drop over this February and March time frame. When -- and if we get back to normal it's not exactly clear. And what the various strains mean the new strains of the virus mean over the longer term is also not very clear. But certainly that cash flow has enabled us to help pay down debt more quickly than we had expected if you'd asked us this almost a year ago, maybe 11 months ago at a faster rate than we had expected. And so we have a pretty solid profitable growth strategy. And we've over the last 1.5 quarters or so have released more investment in the business for high-return projects organic projects.

And as we continue to pay down debt over the next quarter or so, we're more focused on being open to considering bolt-on acquisitions, strategic acquisitions that also we would expect to get really good returns on. So yes, I think we're in really good position with our balance sheet better than we expected again a few quarters ago. And the Batesville business definitely contributed to that with cash flow.

Chris Howe -- Barrington Research -- Analyst

That's right. Thanks, Joe and Kristina. One more if I may. I just wanted to follow up on some comments you made on the last conference call in regard to North America and the large polyethylene system projects in North America. How was that in the quarter? And what's your outlook there? I know it's been slow, but perhaps we're picking up some steam there.

Joe Raver -- President & Chief Executive Officer

No, that -- it remains relatively challenged right now in North America related to the large polyethylene projects. And so we've seen a pretty significant shift to Asia and other parts of the world in terms of large projects that are out there and we would expect to work all the way through to close. It was some -- in some reasonable period of time. So we continue to see sort of stable North American business. But right now it's pretty -- we expect it to be more stable as we go forward. But right now it remains pretty weak in North America in terms of expected order intake. And again, more than offset by strength in China and other parts of the world.

Chris Howe -- Barrington Research -- Analyst

Great. Thanks for taking my questions.

Kristina Cerniglia -- Senior Vice President & Chief Financial Officer

Hey, Chris. Just one clarification as well. When I talked about Batesville long-term, I said 20% to 21% EBITDA margin. You mentioned 21% to 22%, I just want to make sure that, you have that clear.

Chris Howe -- Barrington Research -- Analyst

Yes, got it. Thank you.

Operator

The next question is from Matt Summerville of D.A. Davidson. Please proceed with your question.

Matt Summerville -- D.A. Davidson -- Analyst

Thanks. A couple of questions. I want to make sure, I understand sort of the cadence we should expect in MTS as it pertains to hot runners versus injection molding. So you talked about 37% to 40% growth in Q2. Can you put that in the context of those two product categories and what the expectations would be for the balance of the year there that would get you to mid-teens?

Kristina Cerniglia -- Senior Vice President & Chief Financial Officer

Yes, so we are going to see really -- when we think about the growth for MTS on the hot runner business, generally we are going to continue to see the growth that we've been seeing. It's going to stabilize a little bit. They -- high single-digit growth is what you're going to see maybe in the third quarter that's going to come down a little bit in the fourth quarter for the hot runner business. And then you're going to see that completely flip. You're going to see significant growth on the injection molding business. And so your -- you can expect to see probably high teens growth in the back half that quarter for injection molding

Matt Summerville -- D.A. Davidson -- Analyst

Got it. And then with respect to kind of incoming order rates, overall in that business, can you comment on what you've seen thus far in the calendar year in MTS? And then I want to you spend a second just touching on auto. I would think given all of the platform delays, all of the new model launches that have been pushed to the right as a result of this pandemic I would think there would seemingly be some pent-up demand in auto. So if you're not seeing that now when will you see it?

Joe Raver -- President & Chief Executive Officer

Yes, so I think related to auto, let me just break out two parts of the business in MTS. We are seeing some demand on the Mold-Masters side -- or the hot runner side of the business, Mold-Masters branded products, the hot runners. So we are seeing an increase in demand there. It's not back to sort of like historic levels but solid demand there. But again, still room to grow. I think on the injection molding side, there we've seen the coat pipeline has picked up pretty significantly has not converted to orders yet. And so, that's what -- if you think about the injection molding side of the business it's really about a lot of replacement equipment and capacity expansion not so much driven by new models.

So the new model introductions are really the hot runner side of the business and we have seen some increase there sequentially. It's the injection molding side where we see the quote pipeline starting to pick up but have not -- has not converted to orders. And again that's overall volume and replacement equipment that's going to drive demand in those orders closing.

Matt Summerville -- D.A. Davidson -- Analyst

And then Joe maybe just talk about what you've seen in your order activity calendar year to date?

Joe Raver -- President & Chief Executive Officer

Across the board or in a particular segment?

Matt Summerville -- D.A. Davidson -- Analyst

Sure across the board would be great.

Joe Raver -- President & Chief Executive Officer

Yes. So of course, I won't really talk about Batesville because that's short cycle and pretty obvious. And then, if you look at the APS segment, orders have held up pretty well. So we continue to see the backlog grow in the APS segment. We still expect to see solid demand across the board there. Service has been a little bit challenged but we expect to continue to close large orders and see service improve sequentially as we move through the year. In the MTS segment, we've had solid demand in the hot runner side and that's really a continued growth that we've seen on the hot runner side just sort of like a continuous sequential build in demand on the hot runner side. And then we continue to see strong demand on the injection molding side. We had a big spike in orders in the last quarter. And we expect not as much growth on a sequential basis but still very strong demand on the injection molding side is what we're seeing thus far.

Matt Summerville -- D.A. Davidson -- Analyst

And then, just -- I'll sneak one more in here if I can. In the slide deck Slide 13 you indicated you expect free cash to exceed adjusted net income Kristina recognizing that you probably need a bright hand with space will be a little bit of a wildcard. But what would be sort of a realistic conversion rate that we would expect this year coming off of what was a really good fiscal 2020?

Kristina Cerniglia -- Senior Vice President & Chief Financial Officer

Yes, I would say about 100%. So last year we had a really strong back -- last quarter back half. As we look at this year we've got a lot of large projects that we're delivering. We're using working capital in our Coperion business kind of in the back half. I would expect about 100% conversion.

Matt Summerville -- D.A. Davidson -- Analyst

Got it. Thank you, guys.

Kristina Cerniglia -- Senior Vice President & Chief Financial Officer

Yes.

Joe Raver -- President & Chief Executive Officer

Thanks, Matt.

Operator

The next question is from John Franzreb of Sidoti & Company. Please proceed with your question.

John Franzreb -- Sidoti & Company -- Analyst

Good morning, everybody. Just to follow-up, I guess, on Matt's thoughts here. Joe, it seems like the first quarter there is some satisfaction of pent-up demand. We're going to see that into the second quarter. Can you, kind of, give us a sense of how much you may be deferred orders you expect to come in? And when that reaches equilibrium? What is the opportunity pipeline of pent-up demand in the coming year?

Joe Raver -- President & Chief Executive Officer

Yes. So, I think, it depends -- it's a little bit different for each of the businesses in terms of how --where they -- whether they're long cycle or medium cycle or short cycle. And so just kind of, going through the business and putting Batesville aside -- just sort of going through the business, I think, we've really seen -- so the hot runner business in MTS, it's going to really flow with the global economy. And we've seen that come back with -- as the global economy has improved. And we've seen strength in Asia, particularly, China in that business. But as United States and Europe continue to gain strength, we'd expect to see continued improvement in that part of the business, again probably particularly in North America and in Europe.

On the injection molding side, it's not completely clear exactly how much of the orders that we're seeing now are really pent-up demand. That's, kind of, a big spike and we'll get back to more normalized rates. I would say, that we've had good strong demand. We had good strong demand in the last couple of quarters. It continues. Service -- parts and service continue to grow. And so, I think we'll sort of, level out to more sort of flattish slightly up sequential growth. We had a couple of really nice quarters in a row. A little bit probably last quarter was -- in the fourth quarter it was probably pent-up demand. In the first quarter, it feels a little bit more sustainable. And again, I think, we also have the upside of automotive as we look forward over the next few quarters. So that's sort of, the MTS segment.

And then the APS segment, really we've had exceptionally strong demand for large projects. And so the long-cycle projects demand has been good, demand remains good. Again, a lot of that driven by Asia and some other parts of the world, I think, in the mid-cycle of businesses. So think about compounding machines and feeders. We've seen modest, kind of, sequential growth in that part of the business. And so, I think, that will be more sustained demand as the economy continues to improve around the world. And then parts and service has been challenged and it's been challenged. We're starting to see sequential growth in parts and service. So we expect that to continue to grow on that demand to be very solid and sustainable over the long-term. So really, I think, in the APS business we, sort of, have this air pocket where we have some larger projects that have pushed out that are in the backlog, but we continue to take orders.

And then I think as we look forward those projects get released. We expect to continue to see some large projects close and then we'd see continued strength in parts and service. And then the mid-cycle business as the world economy continues to improve will improve sequentially as well. So that may have been a little bit complicated answer. I hope that helped though kind of get a sense of how we see normal --

John Franzreb -- Sidoti & Company -- Analyst

That was exactly what I was looking for Joe. Kristina, you kind of outlined in depth the impact of commodity costs on Batesville, but can you talk a little bit about commodity costs in the industrial platforms and how that impacts them going forward?

Kristina Cerniglia -- Senior Vice President & Chief Financial Officer

Yes. So let me take it by the separate segments. So, generally in APS with our large projects, we are able to essentially pass that. The way the business works we're essentially able to pass that on to our vendor. So, as you can imagine we know the order. We will place our purchase order on our vendor immediately so that we can lock in the price. So commodity, while there is some commodity inflation in APS, it's not nearly as significant as Batesville and MTS. What we are seeing on MTS is we are seeing inflation. We will continue to see inflation through the rest of the year primarily in steel. And so we expect in the back half of the year in MTS about a little over 100 basis points of pressure on the margin due to inflation in that business.

John Franzreb -- Sidoti & Company -- Analyst

Excellent. Thank you. And regarding the realization of the synergies and integration costs for the current year, can you just talk a little bit about the cadence of realizing that $20 million to $25 million and $25 million to $30 million?

Kristina Cerniglia -- Senior Vice President & Chief Financial Officer

Yes. So this quarter we had $6 million of synergy that hit the quarter. A fair amount of that was a carryover from actions that we had already taken and so we continue to see that carryover. I think when we think about the synergies, the $20 million to $25 million a good kind of cadence would be just divide that by four, and you're going to kind of see that come pretty evenly across the quarter -- sorry, the year. As it relates to the cost, fairly, you're probably going to see a bump in the second and third quarter of that say $25 million to $30 million. It's going to be higher, I would say, in those couple of quarters.

Operator

That's all the time we have for questions today. I would like to turn the call back over to Joe Raver for closing remarks.

Joe Raver -- President & Chief Executive Officer

Thank you, operator. Just want to close with saying we're very focused on executing in this challenging environment. The organization is working hard to execute on what we can control and to react and deal with what we can't control. But we're very confident in our ability to execute, in our ability to continue to be flexible and resilient regardless of what happens with the pandemic. And we're excited about getting debt paid down and our balance sheet in good shape. We're starting to see increasing strength in the acquired Milacron businesses. And so we're bullish on the future and look forward to continuing to invest in profitable growth.

So, with that, I want to thank everyone who are participating in the call today. We really appreciate your interest in Hillenbrand, and we look forward to talking to you again in May when we report our second quarter results. Have a great day everyone. Thank you.

Operator

[Operator Closing Remarks]

Duration: 58 minutes

Call participants:

Kaveh Bakhtiari -- Senior Director of Investor Relations

Joe Raver -- President & Chief Executive Officer

Kristina Cerniglia -- Senior Vice President & Chief Financial Officer

Daniel Moore -- CJS Securities -- Analyst

Chris Howe -- Barrington Research -- Analyst

Matt Summerville -- D.A. Davidson -- Analyst

John Franzreb -- Sidoti & Company -- Analyst

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