Hillenbrand Inc

Greetings and welcome to the Hill & Brand second quarter 2022 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the call over to Sam Hinesburg, Senior Director of Investor Relations. Thank you. You may begin.

Thank you, Operator, and good morning, everyone. Welcome to Hill & Brand's fiscal second quarter of 2022 earnings call. I'm joined by our President and CEO, Kim Ryan, and our new Senior Vice President and Chief Financial Officer, Bob Van Hamergen. I'd like to direct your attention to the supplemental slides posted on our IR website that will be referenced on today's call. Turning to slide three, a 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'll be discussing certain non-GAAP operating performance measures, including pro forma comparisons for our segments. I encourage you to review the appendix and slide three of the presentation, as well as our 10Q, which can be found on our website, for a deeper discussion of non-GAAP information, forward-looking statements, and the risk factors that could impact our actual results. With that, I'll turn the call over to Kim. Kim?

Thank you, Sam, and good morning, everyone. Thank you for joining us today, and I hope you and your families are safe and well. I'd like to start off with a warm welcome to Bob Van Hembergen as our new CFO. Bob brings over two decades of global financial and operational leadership experience, including 15 years in various leadership positions at Johnson Control, most recently as Vice President and Corporate Controller. I'm excited to have Bob join our executive team as we continue to execute on our profitable growth strategy and deliver long-term value to shareholders. I'd also like to recognize our former CFO, Christina Cernelia, for her many contributions over the last eight years. As most of you know, Christina stepped down as CFO at the end of April. Christina played a key role in advancing Hill & Brand's transformation as a world-class global industrial company, and we wish her all the best. Before we discuss our results, I'd like to comment on the devastating humanitarian crisis brought on by the war in Ukraine. We recognize the tragic impact that this war has already brought to many, and our hearts go out to the people of Ukraine. While Helen Brand has only a small presence in the region, I want to assure everyone that we are complying with all U.S. and international sanctions and restrictions, and we are no longer accepting orders for this region. Now I'd like to touch on some key performance highlights. and give an update on what we are seeing across the global operating environment. Overall, I'm pleased with our solid execution in the quarter, which wouldn't be possible without the continued significant and unprecedented commitment by our employees around the world to serve and support our customers. Demand for our industrial products and solutions remained healthy, and we continue to have near-record backlog. As a reminder, order intake can be lumpy based on project decision timings, but our project pipelines remain robust across most of our key applications and end markets. Additionally, Batesville continued to deliver on its mission and performed above our expectations in the quarter. While COVID-related deaths were higher than expected due to the unfortunate effects of the Omicron variant, we saw the daily death rate fall significantly towards the end of March compared to earlier in the quarter, and we have seen this pattern continue through the start of our third quarter, which is in line with what we previously communicated. Like most companies, we are seeing an unprecedented rise in global supply chain disruptions, inflationary pressures, labor constraints, and foreign currency headwinds, which have intensified with the return of COVID-related shutdowns in China and the war in Ukraine. We expect these headwinds will remain through at least the rest of our fiscal year. We are actively monitoring the potential impact of these headwinds on the demand environment and will take action aimed at protecting margins as needed. Our proven track record of execution through challenging economic cycles is enabled by the Hillenbrand operating model, the resiliency of our portfolio, our healthy balance sheet, and the strength of our backlog, all of which gives us confidence in our ability to respond to the current challenges we face. We continue to leverage our global supply management team to help mitigate supply issues, take further pricing actions to help offset additional inflation, and deploy the Hillenbrand operating model to improve productivity throughout the enterprise. I'd now like to take a moment to remind you of our key priorities as we move forward. First, to maintain rigorous focus on managing the business during this challenging operating environment through continued deployment of the Hillenbrand operating model. Second, to maintain our momentum as we complete the third and final year of the Millicron integration. I'm pleased that we continue to remain on track to achieving our target of $75 million in run rate synergies by the end of year three. Third, to pursue profitable growth through product innovation, expansion into emerging end markets and applications, and strategic bolt-on acquisitions that we believe will position us for continued growth. Next, to further incorporate sustainability into how we operate and ensure that our company culture, values, and working norms are aligned to the needs of the evolving global workforce with a committed focus on DEI. And finally, to remain agile and ensure our strategy evolves to meet the needs of the future. I'm excited to announce that we plan to host an Investor Day in New York in December, where we will further expand on our strategic priorities our vision for growth, and provide long-term performance targets. We will share more details soon, and I do hope you will be able to join us. Now I will quickly touch on our strategy, which as you know is comprised of four key pillars. First, to strengthen and build business platforms both organically and through M&A. As we invest for growth within our industrial platforms, there are several key macro factors that we believe will support long-term demand for our equipment and solutions. First, expansion of the global middle class increases demand for durable plastics, which can be created or shaped using our systems. Durable plastics are a key enabler of quality and efficiency across many end markets and applications, including lightweighting of automobiles for improved fuel efficiency, more effective packaging for better food preservation, and more durable and energy-efficient materials used in construction, just to name a few. Next, we believe that the desire for more sustainable solutions will create pathways to long-term growth. Customers, consumers, and regulators are demanding an increase in recycling, recycled and bio-based polymers, alternatives to animal-based proteins, and alternatives to fossil fuels. We believe we are well positioned to meet the growing demand for these applications because of our capability to deliver solutions that produce technically advanced materials with high quality and high output. We are able to achieve this through our innovative products and systems, our applications engineering expertise, and our global manufacturing and service footprint. In addition to investing in product innovation and test labs, and forming strategic partnerships to further the development of our own organic offerings in these areas, we continue to evaluate strategic bolt-on targets within our M&A pipeline where we see the opportunity to accelerate our growth and create long-term value for shareholders. Our next strategic pillar is to manage Batesville for cash. As we continue to grow our industrial product platforms, Batesville is becoming a smaller part of the portfolio. Batesville continues to be a well-run business that generates stable and predictable cash flows in support of our profitable growth strategy. Our third strategic pillar is to build scalable foundations for growth using the Helen Brand Operating Model. We have demonstrated our ability to deliver solid margin performance in both up and down cycles, which has been enabled by the consistent deployment of the Helen Brand Operating Model across our enterprise. Throughout the Millicron integration, we have enhanced the HOM with world-class processes established through our global functions, leveraging our scale, and implementing best practices across all of our operating segments. We believe this foundation will be a key enabler of future growth, as it helps us to accelerate our ability to create value from future acquisitions. The HOM keeps us focused on continuously identifying efficiencies in all areas of the enterprise, which is critical during challenging times such as these. We are also focused on the expansion of the HOM to continue to support our growth, specifically in the areas of innovation, digitization, and commercial excellence. Our fourth and final pillar is to effectively deploy strong free cash flow. Helen Brand has a proven track record of generating cash through economic cycles and deploying that cash through our disciplined capital allocation framework. The strength of our balance sheet gives us confidence as we operate through this uncertain environment and provides flexibility to continue investing for growth, both organically and inorganically, while also evaluating share repurchases. As evidenced by nearly $70 million we repurchased during the quarter and subsequently through May 5th. As always, we remain focused on generating robust free cash flow and using that cash to maximize long-term shareholder value. Before I turn the call over to Bob, I want to provide some key updates on our efforts around sustainability and ESG. Since our last call, we have made several announcements that highlight Hillenbrand's commitment to embedding sustainability into how we operate. In April, Hillenbrand was named the national sponsor of the Girls Inc. STEM and College and Career Readiness Program. We're proud to support the Girls Inc. mission as we look to develop a talented and diverse workforce for the future. Earlier this month, we also announced our partnership with Net Impact, a global nonprofit focused on engaging students on critical social and environmental issues. Through this partnership, we will be engaging with the next generation on the topic of plastic circularity, furthering our commitment to be a sustainability leader within the plastics value chain. Turning to the governance side, in February, our board announced that Helen Cornell was elected to the role of vice chairperson and that she will become our board chairperson in 2023. After the planned retirement of Joe Locri, our current board chair, Joe and Helen are working closely together to ensure a smooth transition. We are excited to have Helen step into this role and greatly value the perspective that she will bring to the position. Lastly, we are excited to be publishing our third annual sustainability report, expected in June. We will plan to begin disclosing Scope 1 and Scope 2 emissions, as well as our energy reduction strategy. I look forward to continuing to share our progress with you as we move forward on our sustainability journey. With that, I'll now turn the call over to Bob to provide details about our overall financial performance, segment performance, and outlook.

Thanks, Kim, and good morning, everyone. I'm honored to be Hill & Brand's next CFO. Hill & Brand has a great foundation, and I'm excited about the opportunities we have to drive significant organic and inorganic growth over the long term. More importantly, Hillenbrand has a great team, and I've been impressed with the quality of talent and level of dedication on display throughout the organization. I'd like to thank Kim and the Hillenbrand board for their confidence in me, and I'd like to thank Christina for her support during our transition. I look forward to continuing Hillenbrand's track record of transparency and shareholder engagement as I meet with many of you over the next weeks and months ahead. With that, Just a reminder that throughout my section, I will be discussing our performance on a pro forma basis, which has been adjusted for the divestitures of ABLE and TerraSource Global. We believe this provides a better assessment of our ongoing operations, and you will find a reconciliation of reported and pro forma results in the appendix of the earnings slide deck. Turning to slide nine, in our second quarter, we delivered revenue of $742 million, an increase of 5%, or 8% excluding the impact of foreign currency. This growth was led by strong performance within our advanced process solution segment and the impact of pricing across all three operating segments. As Kim mentioned earlier, supply chain challenges, inflation, and foreign currency headwinds escalated throughout the quarter. Our teams responded well in mitigating the rising cost, particularly in the areas of transportation and fuel, and we achieved price cost coverage of approximately 90% which was up from 65% in Q1, in line with our expectations. We continually evaluate additional pricing actions required to mitigate the increasing supply chain cost, and we remain on track to achieve 100% price cost coverage as we exit the fiscal year. We reported gap net income of $54 million, or 74 cents per share, a decrease from $1.03 per share in the prior year, primarily due to the prior year gain on the sale of ABLE. Adjusted earnings per share of $1.01 came in at the high end of our expectations and was up 3 cents or 3% compared to the prior year as favorable pricing, productivity improvements, and higher volume were partially offset by inflation, a higher tax rate, increased strategic investments, and the impact of foreign currency exchange. The adjusted effective tax rate in the quarter was 30.1%, an increase of 300 basis points over the prior year due to timing of discrete items. We still expect the full year rate to be in the range of 28% to 30%, as communicated last quarter. Adjusted EBITDA of $137 million increased 4%, or 8% excluding foreign currency exchange, while adjusted EBITDA margin of 18.5% decreased 20 basis points, primarily due to inflation and strategic investments. We had cash flow from operations of $46 million in the quarter, which was lower than the prior year, largely due to timing of working capital. We expect cash flow to be stronger in the second half of the fiscal year compared to the first half, and we are still targeting free cash flow conversion of approximately 100% for the full year. Capital expenditures were $10 million, which was lower than expected, again this quarter due to continued delays from our capital equipment suppliers, which we anticipate will persist throughout the rest of the year. We now expect full year CapEx to be approximately $50 million, compared to the original estimate of $75 million. We continue to focus on high return investments for our business, particularly in the areas of growth and innovation, as well as automation to improve overall efficiency. Our total backlog of $1.7 billion increased 14% compared to the prior year, with record backlog in MTS. Our backlog continues to provide us a strong foundation as we move forward. with approximately 22% of the backlog scheduled to flow beyond the next 12 months. Moving to segment performance on slide 10, we had strong revenue and margin expansion in the quarter for the APS segment. Revenue of $315 million increased 11%, or 16% excluding the impact of foreign currency, driven by higher volume of large plastic systems, favorable pricing, and higher aftermarket parts and service revenue. We were pleased to see yet another quarter of strong aftermarket orders, but supply chain delays and shortages continue to impact our ability to convert to revenue at a normal rate. While we still expect full-year aftermarket revenue growth of mid-single digits, this is lower than we originally expected. Adjusted EBITDA of $65 million increased 24%, or 30% excluding the impact of foreign currency, while adjusted EBITDA margin of 20.7% increased 210 basis points from the prior year. as favorable pricing, operating leverage from higher volume, and productivity improvements more than offset inflation and higher strategic investments. Price-cost coverage for APS was approximately 95% in the quarter, but based on additional pricing actions we are taking, we expect to be back to 100% in the second half. However, as a reminder, even at 100% price-cost coverage, we will see a dilutive impact to margins. Order backlog of $1.3 billion increased 13% year-over-year, or 17% excluding the impact of foreign currency, primarily driven by large plastic systems and aftermarket parts and services. The pipeline for large plastic projects remains healthy with continued solid demand in China. We're also seeing year-over-year and sequential increases in the coal pipeline for India and the Middle East. We continue to be encouraged by the opportunities we see across the strategic end markets for food, recycling, biopolymers, and battery. While these end markets are relatively small portions of our business today, we believe our efforts in developing innovative products and solutions for our customers and forging strategic partnerships will position us well for the future in serving these areas. Turning to molding technology solutions on slide 11, revenue of $251 million decreased 2% compared to the prior year. but was flat excluding the impact of foreign currency as favorable pricing and higher volume in our hot runner product line was offset by decline in volume in our injection molding and extrusion product lines. Adjusted EBITDA of $50 million decreased 1%, while adjusted EBITDA margin of 20.1% increased 10 basis points as favorable pricing and productivity improvements were mostly offset by inflation. Price-cost coverage for the quarter was approximately 95%, which was in line with our expectations. We continue to see opportunity to expand margins in the segment over the next several years, particularly within the injection molding product line through the deployment of the Hillenbrand operating model. Order volumes continue to be solid for both hot runners and injection molding, but we're down from last year where we experienced pent-up demand for injection molding equipment. Record order backlog of $418 million was up 15% compared to the prior year and 3% sequentially. With that being said, we continue to see supply chain and labor constraints affect our ability to convert orders to revenue as quickly as we would have in a normalized environment. Turning to Batesville on slide 12, Batesville performance performed above our expectations given the unfortunate circumstances related to the Omicron variant. Compared to the prior year, Revenue of $176 million increased 6% due to higher average selling price, primarily due to the price surcharge implemented in January to offset significant increase in commodity costs. Burial volume was lower than the prior year, primarily due to an estimated increase at which families opted for cremation. While we continue to monitor the latest trends, we expect deaths to return to pre-pandemic trends as we progress through the second half of fiscal year 22. And as Kim mentioned, we have already begun to see this take place through the start of the third quarter. Adjusted EBITDA of $37 million decreased 17%, and adjusted EBITDA margin of 21.1% decreased 580 basis points as inflation and the impact of lower volume outweighed our pricing actions and productivity improvements. As a reminder, the price surcharge has a dilutive impact to margins since it is fully offset by inflation on a dollar-for-dollar basis. Price-cost coverage was approximately 80% in the quarter, which was lower than we expected due to the continued rise in commodity and transportation costs. In response to the continued inflationary pressure, we are implementing an additional commodity price surcharge to help mitigate the impact. Now turning to the balance sheet on slide 13, Net debt at the end of the second quarter was $769 million, with a net debt to adjusted EBITDA ratio of 1.4, which was essentially flat on a sequential basis. As of quarter end, we had liquidity of approximately $1.3 billion, including $445 million of cash on hand and the remainder under our revolving credit facility. As of March 31st, we had no borrowings on our revolver and no near-term debt maturities. Given the strength of our balance sheet, I am confident in our ability to manage through the uncertain operating environment and continue to drive profitable growth strategy to deliver long-term shareholder value. Moving to capital deployment on slide 15, we returned approximately $43 million to shareholders during the quarter through the purchase of approximately 580,000 shares for $27 million and 16 million through our quarterly dividend. So far during the third quarter, we have repurchased approximately 930,000 shares for $41 million, and we have approximately $233 million remaining under our authorization. We continue to maintain our disciplined approach to capital allocation with a focus on maximizing long-term shareholder returns. Our top priority for capital continues to be strategic investments to drive profitable growth in our industrial product platforms, including strategic bolt-on M&A opportunities that we expect will accelerate our growth and provide appropriate returns. We will also continue to consider opportunistic share repurchases. Turning to slide 15, I will conclude my prepared remarks with an update on our outlook for the third quarter and full year. As a reminder, our guidance is on a pro forma basis, which is adjusted for the divestitures of RedValve, ABLE, and TerraSource. As a basis for our outlook, We expect supply chain disruptions, inflation, labor market shortages, and foreign currency to remain a headwind through the rest of the year. I'd like to highlight that we are continually monitoring the evolution in China and continued impact from the war in Ukraine. Our guidance assumes China capacity normalizes as we enter June. However, a worsening of the macro environment, including additional or prolonged shutdowns in China, or a further escalation of supply chain issues, or inflationary pressures will have an adverse effect on our targeted performance. We are raising our estimate for the full-year consolidated revenue to be $2.9 billion to $2.98 billion, a year-over-year increase of 4% to 6% compared to our previous estimate of up 3% to 6%. We are maintaining our expectation for full-year adjusted earnings per share to be in the range of $3.80 to $4. For APS, we are maintaining our full-year revenue expectation as lower ability to convert aftermarket orders and additional foreign currency pressure is being offset by continued strength in large plastic systems and additional pricing. We are updating our full-year margin outlook to be in the range of 20% to 21%, which still reflects year-over-year expansion of 50 to 150 basis points, but is lower than our previous guidance primarily due to the dilutive effect of price cost and unfavorable portfolio mix. For MTS, we are maintaining our full-year revenue and margin expectations. While we expect a shortfall in hot runner revenue in Q3 due to the shutdowns in China, we currently expect to recover the shortfall within the fiscal year. Now turning to Batesville, we expect revenue to be in the range of $605 million to $615 million, down 1% to 3% versus the prior year, compared to our previous expectation of down 5% to 6%. This change is a result of higher than expected volume in our second quarter and additional surcharge pricing in the second half of the fiscal year. We are maintaining our expectation for Batesville margin to be a range of 20 to 21% for the full year. Finally, for our third quarter, we expect the COVID related shutdowns in China to negatively impact performance, primarily within our hot runner product line, where we have already seen roughly $10 million of top line impact in April. The situation has modestly improved so far in May, and our current guidance assumes further normalization as we enter June. We currently expect to recover the shortfall in our fourth quarter. We expect our Q3 adjusted earnings per share to be in the range of 83 cents to 90 cents, down sequentially primarily due to lower Batesville volume, the impact from China, and further corn currency pressure. Batesville margin and revenue will be down on a sequential basis due to significantly lower volume as a result of lower COVID deaths and normal seasonality of base deaths, in addition to the dilutive impact of price cost. We expect APS to be roughly flat on a sequential basis for both revenue and margin. Lastly, we expect MTS to be modestly higher on revenue, but modestly lower on margin compared to Q2 due to higher relative mix of injection molding equipment. Please review slide 15 of the earnings presentation for additional guidance assumptions. And now I'll turn the call back over to Kim.

Let me leave you with some final remarks before we take your questions. We are operating in an unprecedented time. We are closely monitoring the external environment and are prepared to take action if needed to protect the long-term health and profitability of the business. As a reminder, we have a proven track record of execution through challenging economic cycles. And we remain confident in our ability to build upon that track record as we move forward due to a few key factors. Underlying industrial and market demand remains healthy and our robust backlog continues to give us visibility and confidence. Second, the continued deployment of the Hillenbrand operating model keeps us focused on improving efficiency and executing our growth initiatives throughout the enterprise. And finally, Our strong balance sheet provides us flexibility to operate in this uncertain environment while continuing to execute our profitable growth strategy and drive long-term shareholder value. We look forward to sharing more details about our vision for growth and longer-term targets for Hillenbrand at our planned investor day in December. We'll now open the line for your questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for your questions. Our first questions come from the line of Daniel Moore with CJS Securities. Please proceed with your questions.

Thank you. Good morning, Kim. Good morning, Bob. Thanks for taking the questions and the detail. Let me start with the backlog. It continues to be pretty robust. In terms of the growth, how much of that was pricing versus volume, and what kind of FX impact or headwinds is there as we kind of parse that?

Hey, good morning, Dan, and thanks for the question. Yeah, so if you look at backlog, we're up mid-single digits from last year, and pricing's about 6% of that increase. Volumes is about 11%, and then you can do the math, and foreign exchange is about a 3% headwind on the backlog for the quarter. But I tell you, you know, we'll continue to monitor. You know, we'll continue to monitor cost increases. We have a good process in place with our global supply management team, and so we'll continue to do that. And so we could see further inflation impacting our pricing going forward in backlog. But, you know, that's kind of the color for the quarter where we ended the, I guess, Q2.

Very helpful. And then beyond the backlog, You know, how would you describe overall order activity and the level of the pipeline of new business opportunities, you know, both APS and MTS? Are we, you know, kind of steady? I think you mentioned orders were down slightly year over year in MTS. You know, what are you seeing and feeling in terms of activity levels?

Yeah, good morning, Dan. It's Kim. So demand overall remains healthy across most of our key end markets. We'll start with APS. We continue to see a good pipeline of orders. We continue to see high quote volume for not just capital projects, but also the parts business. And although we've seen some softness as a result of supply chain in our ability to work those parts orders through the system, we do continue to see really good performance on orders in both of those areas. For MTS, we've continued to see strength in their order pipelines. And while they've had, obviously, some disruption as a result of some of the things going on in China, we've continued to see strength in most end markets. The places where we're seeing a little bit of softness, as you might expect, are in areas of medical from a year-over-year perspective. Obviously, as COVID continues to become more of a normal part of operating procedures, some of the medical work that was done last year is not repeating. And we're also seeing a little bit of slowdown in some of the construction work that we do on the injection molding side. And that's, as you can imagine, not surprising given what we're seeing with interest rates and people kind of slowing down a bit on some of the construction decisions. But otherwise, in the other key markets that we're operating in, automotive and packaging and some of those areas, we're continuing to see strength in those areas.

Perfect. That's very helpful. And then Maybe one more just on capital allocation. Obviously, continue to be aggressive in terms of returning cash to shareholders, given where you are in terms of your leveraged guardrails. In terms of M&A, are you seeing opportunities, particularly in some of those recycling clean energy biopolymers? Are there opportunities, realistic multiples, or are we still more in the, let's say, conversational stage at this point? Thank you.

So, we are, as we've discussed on prior calls, we're very active in monitoring what kinds of opportunities might be helpful in building out those key in those new market areas, recycling, food, battery, those biopolymers, those areas that we're investing in. We do continue to look for opportunities for us to fill out systems that we can offer into the marketplace. As you know, there are a lot of niche players in that recycling space right now, and so there are more opportunities to get into some smaller technology plays, and that's what we're continuing to monitor in that area. In terms of multiples, I mean, it depends on which area you're looking at. Some places, as you know, multiples are pretty sporty, but I think our processes are such that we're very disciplined about the way we evaluate those and our ability to return our required rate of return process, and we're pretty disciplined about making sure that we're going to be able to get an appropriate return and realize synergies on the opportunities that we're looking at. So I think if we execute on something, then I'm quite confident that it will be something that we can really create an appropriate return with. But we are actively looking.

Understood. Okay. I appreciate the color. I'll circle back with any follow-ups. Thank you.

Great, Dan. Thanks.

Thank you. Our next question has come from the line of Chris Howe with Barrington Research. Please proceed with your questions.

Good morning. Thanks for taking my questions. And if there's any sudden loud noises in the background, I apologize. But just following up on some of the last questions that you received around M&A, as we think towards the latter part of this year and your investor day, You're obviously active in the funnel. You have a good feel of the pricing environments. However, as we move along the timeline, at some point, does it become part of your long-term strategy as you think about organic plus inorganic growth and the potential for that longer term?

So what I would say to you is that we are obviously prioritizing Given that we, you know, M&A is a low yield game, right? So we can't depend only on that in order to expand into these end markets. So when we talk about investments, I would tell you that we are investing organically in moving into these end markets because we absolutely believe that we have capabilities that we can bring to these end markets that are important for customers and consumers. of these products. So we are investing on our own in these areas, specifically in the areas of new product development and building out our own sales channel and adding resources from an engineering and technical capability. We are investing in test labs for a couple of these applications so that we have dedicated test lab facilities in order to be able to show customers what we're capable of creating for them from a systems standpoint. So we are definitely continuing to chase organic investments in order to grow in these markets. And then we will opportunistically look at whether or not there are appropriate partners that can come into the portfolio and are another value add into what we do and that can run under the header of the Hillman Brand product families. Does that help, Chris?

It does. It does. Thank you. And moving into my next question, let's see if I can phrase this simplistically. As we think about the China lockdowns, you mentioned the $10 million top line impact in April, your expectation to recover this for the hot runner business in Q4. We know the Shanghai lockdowns are still ongoing. I guess from an overall perspective, can you talk about the China region as it pertains to the business across the segments? And then a follow-up on how China specifically applies to the MTS hot runner business expectations.

Sure. So as you may be aware, those lockdowns are in specific geographic areas at this time. And so While we have all of our businesses, well, many of our industrial businesses have some footprint in China, the most prevalently affected by this has been the Moldmasters product line and that Hot Runner product line. So that is the area where we felt most impact, specifically from some of the lockdowns and facility closures. Obviously, everyone is feeling the pressure The big tail effect of how that is impacting the global supply chain, the transportation slowdowns, the cost of transportation, all of those types of things are where we're experiencing in the other businesses, which are incidentally up and operating. So the businesses that we have in Nanjing and Wuxi, are operational. Some of our businesses in Shanghai are capable, for instance, we have engineering offices there. They are capable of working from their home, so they are continuing to operate. From a manufacturing standpoint, we were certainly affected for multiple weeks while all facilities in the Shanghai region were shut down. We are just north of Shanghai in Kunshan, but we have been over the last several weeks allowed to bring back in small waves some of our employees back into the area. And as Bob mentioned earlier in the prepared remarks, part of our planning for some of the difficulties we were seeing with the supply chain was to increase our inventories. So as we've been able to get employees in, we've been working to try and be very strategic in how we're gearing those operations back up in order to satisfy our backlog and our customer demand. Like many companies, we have a closed-loop system for the employees who are back there to try and make sure that they are not exposed and that we're able to continue to operate and they're able to continue in a very safe environment. And I have to take my hat off to the team there. They have just gone to extraordinary measures to make sure that their employees are safe, that they planned ahead as much as possible to try and give themselves the opportunity to operate, and that they are really working very tirelessly to try and make up some of the challenges that this has created in the performance in the third quarter so far. But it will take most of the third quarter and definitely into the fourth quarter to try and recover what the impacts of those shutdowns were.

Got it. That makes sense. Just a quick follow-up to that, and then I'll hop back in the queue. As it relates to mold masters and the China lockdowns, can you comment on what you're seeing as far as within the supply chain as you recapture these deferred revenues? Is there a bottleneck that we're having to deal with? And how is your modality of transportation being impacted by the environment?

So I think that a lot of businesses are not able to to make some of the capital decisions that they would normally make at this time. And as things open back up, I think that you will see things return a bit to normal, whether that creates a lot of pent-up demand. It's really been basically a little over a month since these locations shut down realistically. So I don't know that you're going to see a big swing in that. In terms of transportation, Certainly, we have a number of suppliers for our industrial businesses in China. And so what we have been doing is working very diligently using the contracts and the agreements that we have in place to try and prioritize our shipments. But also, we're using other ports in order to expedite getting product out. So, for instance, if the Shanghai port is very full and not processing quickly, then we will transport our goods to other ports where we believe we have a better opportunity to get to get goods and services out to the locations that need them. And we've been actively managing that for a number of weeks now with our global supply management team, who not only handles the suppliers, but also the transport of those goods into our facilities for manufacture.

Okay, great. Thanks for taking my questions. I appreciate all the trouble.

Sure. Thanks, Chris. Thank you. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Our next questions come from the line of Matt Somerville with TA Davidson. Please proceed with your questions.

Hi, this is Will Jellison on from Matt this morning. Good morning.

Good morning, Will.

Good morning, Will. Jim, I have a follow-up question for you on what you just spoke of regarding some of the challenges you're facing right now. I guess I'd like to learn a little bit more about what you're seeing from your competitors in terms of their response to the current environment and whether or not you believe that the challenges that the world is facing today might actually present long-term opportunity for a business like Hill & Brand to gain share or maybe open doors that might not have been opened otherwise.

So I think the competitive situation really changes by business and by competitor. The location of many of our, if you're specifically referring to the China situation, Will?

Well, China and a variety of other challenges, I guess the whole spectrum.

Okay, so let me retrench a little bit then. I would say that one of the things that we have been focused on is trying to make sure that we have a philosophy around, in many ways, build where you sell and buy where you make, right? Make where you sell and buy where you make. And so that has been a, and our global footprint has been something that I believe has helped us during some of these challenging supply chain topics. So that, I would say, gives us the ability to keep our operations running and to be able to respond. We've also been working very diligently on trying to make sure that we – normally we are a very just-in-time kind of inventory philosophy, especially as we're working to maximize supply minimize working capital in the business and maximize our free cash flow. However, obviously with some of the global supply challenges, we've been very purposeful in creating what we refer to as some just-in-case inventory in order to be better prepared. I think the fact that we have manufacturing facilities in the Americas, in Europe, and in Asia, the fact that we have supply base that also operates in those regions, that we have service employees and sales employees all over the world throughout the last couple of years has created an opportunity for our business to be able to respond to the parts of the world that are operating as normal and the parts of the world that are having these types of challenges that we've just referred to in the last couple of definitions. So we do believe that that is a that that is a benefit to us. I think we've seen continued positive trends on our orders and on our backlog and on our revenues as a result of that. So we believe that that part of our strategy is executing as planned.

Understood. Okay, thank you. And then for my follow-up, I'm wondering, has the current inflation environment In terms of the way you think about M&A, has it changed the way you think about the cost of holding cash on your balance sheet, and has it at all altered the sense of urgency in putting capital to work here, or is that relatively unchanged relative to your core philosophy?

Yeah, so what I would say, you know, I don't think it's changed our philosophy. I mean, we're going to maintain our discipline around capital allocation. As Kim mentioned earlier, right, we're going to focus on new product development, expanding our sales channel, and looking at automation and efficiency programs. But obviously M&A is a big piece of our strategy, and we'll focus on both on acquisitions, but we're going to be disciplined in how we assess those investments. All right, so I don't think it's changed how we're thinking about our strategy.

Understood. Okay, thank you for taking my questions this morning.

Thank you.

Thank you. There are no further questions at this time. I would now like to turn the call back over to Kim Ryan for any closing comments.

All right, thank you. Thanks, everyone, again, for joining us on the call today. We appreciate your ownership and interest in Hillenbrand and look forward to talking with you again in August when we report our fiscal third quarter results. I hope you all have a great day and stay safe and healthy. Thank you.

This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.