Hillenbrand

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Hillenbrand is a global industrial company that provides engineered solutions and equipment, focusing on highly engineered plastics, process equipment, and die casting and mold technology across diverse industries.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Hillenbrand’s competitive advantage stems primarily from its strong brands and long-term customer relationships within its key segments. However, high customer churn, limited switching costs and intense competition significantly weaken the durability of its moat, leading to a moat rating of 2 / 5.

Business Explanation

Hillenbrand (HI), operates through two main segments:

Advanced Process Solutions (APS): This segment is a global leader in highly engineered plastic compounding systems, extrusion equipment, and material handling equipment. It serves a range of industries, including plastic, chemical, food, and transportation, among others. This segment is the biggest contributor to the total revenue.
Molding Technology Solutions (MTS): This segment focuses on the design, manufacture, and sale of injection molding and extrusion equipment, hot runner systems, and process control systems. Key industries served include medical, automotive, consumer packaging, and electronics.
- MTS is focused on selling equipment and software to its customers and has recently acquired more companies in the market. They have the following subsegments: Hot Runner Systems and Core Components, as well as its software segment.
- The company is integrating its systems with more and more data to support their customers.
Other: The other segment mainly consists of their “Strategic Sourcing” business, where they source equipment from suppliers, and a minor part of their operating income.

Revenue Distribution: Hillenbrand’s revenue streams are diversified across several end markets, including industrial, building, consumer, and medical. A significant portion of its revenue comes from recurring aftermarket products and services, which supports its resilience during market fluctuations. The international market makes up approximately 66% of their total revenues, with Americas and Europe both being the biggest markets.

- The company’s geographic breakdown has remained stable over the past years.
The company sells both equipment and also sells after-market spare parts and maintenance. That recurring revenue makes up a considerable portion of the business.
The aftermarket side of the business has a gross profit margin that is close to 50% compared to the segment as a whole which only has close to 30%.

Hillenbrand’s revenue is diversified by geography, product type, end markets, and customers which reduces the risk of overreliance on any particular customer or market. However, they operate in very competitive industries with very little switching costs or customer lock-in, making them very prone to disruption and unable to charge premium prices, which is very bad for the overall moat of the business.

Industry Trends:

Globalization: Increased demand for consistent and quality manufacturing across the globe. Companies are increasingly looking for suppliers that can serve them globally with good services and solutions.
Sustainability: Pressure from governments and consumers to adopt more sustainable practices. Companies in many industries are forced to implement more recycling and efficiency measures in their supply chains.
Technological advancements: Growing adoption of automation, digitization, and software in manufacturing. Customers are demanding more innovative solutions to automate their manufacturing processes.
Shift in supply chains: Increased volatility in the global supply chains has caused many companies to explore new options to improve reliability and increase diversification.

Hillenbrand is operating in several industries, some of which are growing fast but also has several intense competitors. They also need to continually adopt new technology and changing demand, or risk losing to competitors. These are significant risks that affect the moat of the business.

Competitive Landscape:

Diverse Competitors: HI faces competition from many large and small players, which operate globally and locally. Some competitors might specialize in certain niche products while others offer a wider portfolio, but all of them are generally able to provide almost the same products and services.
Intense Competition: Competition is stiff due to the ease of replication and the commoditization of some products. It is very hard for the company to price its products higher than its peers.
Price Sensitivity: Customers are highly price-conscious due to low switching costs and readily available alternatives. That puts a lot of pressure on margins.

What Makes the Company Different:

Global Scale: HI’s extensive global network provides a competitive edge. They also have manufacturing facilities all across the world, allowing them to serve customers quickly.
Strong Brands: The company boasts well-known brands, like Milacron, Coperion, and Rotex, which they have acquired or built for years. These brands provide recognition, but in no way make switching costs high.
Engineering Expertise: Hillenbrand has strong engineering capabilities, which allows them to develop tailored solutions for their clients. They have significant experience in handling large complex projects. They can offer custom engineered solutions tailored to customer needs.
- This expertise comes especially from their acquired companies, many of whom had been in the business for many years before the acquisition, so the acquired management team and engineering know-how is a very important asset for the company.
Recurring Revenue: Their aftermarket parts and services segment provides a reliable source of income with higher margins that mitigates the impact of cyclical industries.
- However, the aftermarket parts have recently been seeing supply chain disruptions, which will require further improvements in that front to keep that competitive advantage high.

Financial Analysis

Revenue Growth: Over the years HI’s revenue has grown at a rate of 4% to 7%. This is not a very high growth number. Also this is a cyclical business that is very dependent on overall macro trends and demand, making their revenue prone to volatility and unpredictable.
Margins: HI’s gross margins are around 30% on average which is respectable but not that great. This is because the business has limited pricing power over its customers and operates in a price-sensitive industry. Operating margins are only around 12% to 13% which are also average.
Profitability: ROIC has ranged from 6% to 10% over the past few years, which are below what one would expect from a highly rated company, implying they are unable to command large premium prices for their products. They have been trying to increase operating margins but have had troubles with that because of competitive pressures.
Cash flow: They do have healthy free cash flow which gives the company flexibility in capital allocation. They tend to have a highly variable cash flows due to various factors like project timelines, which affects their working capital, seasonality, and market environment.

Latest concerns / controversies

Impact of macroeconomic uncertainty: HI faces uncertainty due to fluctuations in various industries that they operate in. Economic conditions, such as high inflation and interest rates can directly impact the company’s ability to produce and sell its products and services and the consumer’s buying ability.
Supply chain issues: As discussed earlier, supply chain disruptions in certain parts of the business, specifically aftermarket parts is still an ongoing concern, although it has improved from peak times. They have had to take higher costs in raw materials that are very hard to fully pass onto customers.
Acquisition integrations: They have recently acquired a few companies in their Molding Technology Solutions segment. Integrating such acquisitions and capitalizing on the synergies is crucial for driving their long-term value and is something that they are trying to aggressively improve.

These concerns, though being largely external factors, do pose a considerable risk to the moat of the company and their competitive advantages.

Understandability: 3 / 5 Hillenbrand’s business is relatively complex as the company operates in diverse industrial sectors, and within each sector the individual companies are also very complex. While not incredibly difficult, it still requires substantial work to understand the competitive landscape and economic drivers for every part of the business. Thus, a ranking of 3 / 5 seems justified.

Balance Sheet Health: 3 / 5 Hillenbrand’s balance sheet has some positives but also shows some concern for the future.

- The company has a high debt-to-equity ratio, which is concerning for future financial stability. They are trying to reduce debt over time. The company management has a target of 15% or below for debt/capitalization, but are still far away from that.
  - Their financial performance is also dependent on macro trends which are difficult to predict. The company has a good liquidity position. They have positive cashflows and also a reasonably high current ratio which means they have a good ability to make near term obligations.

Given the above, the company’s balance sheet has some positive signs, but also several concerns, leading to a balance sheet health rating of 3 / 5.