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Hillenbrand, Inc (NYSE:HI)

F1Q13 Earnings Conference Call

February 5, 2013 08:00 AM ET

Executives

Kenneth Camp - President and Chief Executive Officer

Cynthia Lucchese - Chief Financial Officer

Chris Gordon - Director of Investor Relations

Analysts

Daniel Moore – CJS Securities

Steve O’Neil – Hilliard Lyons

Operator

Good morning, everyone, and welcome to Hillenbrand's Earnings Call for the First Fiscal Quarter of 2013. A replay of the call will be available until midnight Eastern Time, Tuesday, February 19, 2013, by dialing 1 (855) 859-2056 toll-free in the United States and Canada or 1 (404) 537-3406 internationally and using the conference ID number 72270230. This webcast will be archived on the company's website at www.hillenbrand.com through March 5, 2013. If you ask a question today, it will be included in any future use of this recording. Also, note that any recording, transcript or other transmission of the text or audio is not permitted without Hillenbrand's written consent.

At this time, it is my pleasure to turn the conference over to Chris Gordon, Director of Investor Relations. Mr. Gordon, please go ahead.

Chris Gordon

Thank you, Stephanie and good morning. Welcome to our earnings call for the first quarter of fiscal 2013, which ended on December 31, 2012. With me on today's call are Hillenbrand President and Chief Executive Officer, Ken Camp; and Chief Financial Officer, Cindy Lucchese. During the course of today's conference call and the question-and-answer session that follows, we may make projections or other forward-looking statements that are subject to the Safe Harbor Provisions of the Securities Laws regarding future events or the financial performance of the company. We caution you that these statements are only our view of the future and that actual results may differ materially. We also alert you to the risks described in the documents we file with the Securities and Exchange Commission, such as our annual and quarterly reports on Forms 10-K and 10-Q. We do not undertake any obligations to update or correct any forward-looking statements.

Now, let me provide some information regarding our call. We've scheduled one hour, and we'll start with prepared remarks from Ken and Cindy that should last approximately 20 minutes. Ken will start with an overview of the business from the past quarter, Cindy will follow with financial results and Ken will wrap up the prepared portion of the call with some closing comments. After that, we'll move directly to Q&A, when we'll be joined by Batesville President, Kim Dennis; and Process Equipment Group President, Joe Raver. If you have follow-up questions after the call has ended, please feel free to call me at (812) 931-5001 or e-mail me at chris.gordon@hillenbrand.com.

Now it's my pleasure to turn the call over to Ken Camp, Hillenbrand's President and Chief Executive Officer. Ken?

Kenneth Camp

Thanks, Chris. Good morning everyone and thank you for joining us today. This was an important quarter for us on several fronts. As you know we completed the transformation and acquisition of Coperion Capital GmbH, welcoming them to the Hillenbrand family on December 1 and in this early going, we’re pleased with Coperion’s performance. Especially, as we began down the path of immigrating certain high priority processes.

Our revenue increased significantly growing more than 30% year-over-year, results that were supported by both the process equipment groups and the Batesville platform. In fact Batesville’s quarterly growth was the largest it has been in several years. And I am also pleased with our bottom line as we posted strong adjusted EBITDA growth of 6%. Cindy will provide more details regarding the financial results in just a few minutes.

I’d like to start my discussion of the platform performance with the process equipment group which grew significantly due primarily to the Coperion acquisition. Revenue grew nearly 80% to more than 150 million and backlog quadrupled compared to the first quarter of 2012. Backlog gives us visibility in the future revenue, so symmetric that we monitor closely. And I’d like to spend a few minutes giving you some detail regarding our current position.

As a reminder, the process equipment group serves a variety of industries which provides us with a measure of market and geographic diversification. We’re pleased that backlog in some of our largest segments particularly petrochemicals and plastics remain solid. However, we’ve began to see signs of some slowing of capital expenditure in certain end markets that we serve.

In fiscal 2012, the demand for profits which were used in the hydraulic fracturing process of natural gas drilling experienced a dramatic almost explosive acceleration. This had the effect of falling equipment sales, plan for 2013 into fiscal 2012. As a result, there is very little related to (inaudible) equipment in our current backlog. However, we believe that demand will catch up with current supply and over the long run this will remain a very attractive market segment for us. We’ve also seen a slowdown in capital equipment orders primarily in coal and potash. With some projects getting pushed out to 2014, much of this appears to be driven by the general economic and business uncertainty in Europe.

On the positive side, we feel confident about the future of the petrochemicals and plastic industries and believe they are leading a renaissance with manufacturing in the U.S. As you may know, natural gas is used as the hydrocarbon feedstock for plastics. The vast supply and low pricing of natural gas in the U.S. is leading the plastic industry back here and pulling manufacturing and the support manufacturing with it. As every business likes and needs to be closed to its supplier. There is also an increasing demand for coal in geographies outside the U.S. as China, India and Russia experience increased demand for energy primarily derived from coal. If you’ve listened to our earnings calls before, you’ve heard us say that our core element of Hillenbrand’s growth through acquisition strategy is to acquire successful companies with great brands that can benefit from our core competencies of strategy management, lean business and intentional talented elements.

Coperion is a great example of how this strategy is working and I would like to update you on the integration process for Coperion. Joe Raver and his leadership team are diligently executing actions to capitalize on selected near term opportunities while also structuring the group for long term gains. They’re following a very disciplined process in managing the integration efforts that include full time senior leadership and on the ground resources in Germany with joint work teams and cross company participation.

You may recall from our previous discussions that our number one integration priority is increasing cross product utilization, that is having Coperion sell other process equipment group products within their systems and vice versa. We believe that providing complete system sale gives us a competitive advantage and the customers prefer doing business with one trusted supplier that can provide a turnkey system for them. We’ve already quoted a number of projects that incorporate products for multiple product families within the group. One of the core competencies we bring to our acquisitions is the implementation of lean business systems from the shop floor to the office and we’ve already begun this piece of our integration process with Coperion. Significant time and resources are being devoted by both Hillenbrand and Coperion people to educate the team on lean principles, then how to create value using them in the organization.

These lean activities will be essential as we work to increase Coperion’s margins and overall profitability. By the end of March, nearly 100 of their worldwide management team will be through the initial lean training and multiple improvement projects have been identified with several already underway. Using Coperion’s existing geographic network of 29 parts and service centers to accelerate the growth of our existing Process Equipment Group businesses is an opportunity for us to integrate many geographies.

Overall, we’re pleased with the initial progress, but we realize that we have several years work ahead of us and we’re very bullish on the benefits of the acquisition and will continue to update you on the integration process during the year.

Turning briefly to Batesville, Batesville as I said had the best quarter they’ve had in a long time, growing revenue 4%. North American debts have returned somewhat to generally historic levels, although cremations continue to grow at the past rates of about 120 or so basis points per year. This resulted in a more normal decline in burials this quarter than the spike we saw a year ago. Given the volume decline we experienced at Batesville last year, the Batesville leadership team has implemented several actions to right size the organization and to further improve their production and logistics capabilities. These actions make them more agile to compete in changing market conditions and to meet the requirements of their customers. And albeit the results of these actions and others have enabled Batesville to continue to improve their gross margin sequentially for the second quarter in a row, now approaching 40%. As we think about the longer term trends in the funeral products industry. We know that healthcare is getting better and thank goodness it is. People are living longer which is good news for all of us and the point here is that we cannot predict the certainty what the North American burial demand will be and we need to continue to be as lean and flexible as possible to meet the evolving needs of our customers and the families they serve.

Now, I'll turn the call now over to our CFO, Cindy Lucchese. Cindy?

Cynthia Lucchese

Thank you, Ken. In summary, this was a strong quarter for us with attractive growth at the top line, as well as the bottom-line on an adjusted basis. Revenue grew 32% to $305 million and driving this growth was the acquisition of Coperion with our Process Equipment Group delivering a $154 million in revenues about an 80% increase over the prior year.

Now, without the addition of Coperion the Process Equipment Group would have shown a slight decrease at the top line as we saw a few large (inaudible) second quarter and I am sure you’ll recall that we periodically experience this lumpiness when large orders are in a backlog and it can cause fluctuation from quarter-to-quarter.

As Ken mentioned, Batesville had a strong quarter with revenue growing 4% of $151 million and this was driven by volume at the year-over-year growth rate of North American debt returned to more typical historical levels. I do want to mention that Influenza did not have a significant impact on first quarter results. While flu activities did begin to increase during the quarter, pneumonia and Influenza mortality didn’t reach epidemic levels until January.

Turning to margins, our growth profit margin for the first quarter was 36.2%, on an adjusted basis it was 37.2% or 100 basis points higher and that represents about a 330 basis points decrease from the prior year. Now, this decline was extended and it is entirely due to the addition of Coperion which had lower growth margins because about a third of their revenue comes from third party sourced products were buyouts where margins on buyouts are fairly small. So, the other two thirds of their revenue comes from their own proprietary equipment sales in parts and service, both of which have very attractive margin that are similar to the margins of our other Process Equipment Group products. So, on an adjusted basis the impact on the Process Equipment Group this quarter was a declining growth margin from about 42% in 2011 to about 36% in 2012.

You could expect a greater impact on the growth margin in the future as the full three month of Coperion operation will be included versus the one month included in our first quarter. Growth margins in the Process Equipment Group should be in 31 to 33% range on the go forward basis. Batesville gross profit margin was 38.7% or 38.9% on an adjusted basis. The 17 point year-over-year decline was primarily due to changes in employee benefit that reduced the expense in the prior year and won’t recur this year as well as increased commodity cost.

Our adjusted effective tax rate this quarter was 27.9% compared to 30.6% in the prior year. This improvement was primarily due to the acquisition of Coperion which has a larger percentage of income that comes from lower tax rate jurisdiction. Now, looking forward we expect our full year adjusted effective tax rate to range between 30 and 31%. Operating cash flow was $20 million this quarter compared to $27 million in the prior year. This decline was due to $8 million in business acquisition cost related to Coperion and $5 million related to anti-press litigation. Turning to bottom line results for the quarter, net income decreased 54% to $14 million with earnings per share down 54% to $0.23. The decrease was driven by the tax benefit recognized in the prior year due to the international integration as well as higher acquisition or weighted cost in the current the year. Now on an adjusted basis net income increased 4% to $26 million inuring per share increased 3% to $0.41.

Given our strategy to grow through acquisition, it’s a natural consequence to incur a weighted expense such as amortization and interest. So, accordingly EBITDA is an important measure that we use to measure our ongoing operating performance. Hillenbrand’s adjusted EBITDA increased 6% to $51 million. Now given Coperion’s average adjusted EBITDA margin of 10%, compared to the higher margin of our existing businesses, it is a natural resolve that the growth rate in adjusted EBITDA will be lower than that of revenue during our first year of acquisition. So, in other words the Coperion carries the same margin as our existing businesses, we would have achieved an EBITDA of growth rate more in line with our revenue growth.

Turning to guidance we are reaffirming the guidance we shared with you in our announcement at the closing of our acquisition of Coperion in early December. And we continue to expect 2013 global revenue to be approximately $1.6 billion, and adjusted diluted earnings per share to range from a $1.82 to $1.92. Based on our visibility into backlog, we expect the fourth quarter to be our larger, both from a revenue and earnings perspective and follow closely by our second quarter, which is driven by the seasonality of Batesville’s business.

Now, I’ll turn the call back to Ken for his concluding remarks. Ken?

Kenneth Camp

Thanks Cindy. As most of you know Hillenbrand is a thoughtful prudent Company with a long-term view of the future. We’re deeply committed to the disciplined acquisition strategy that’s been the key to our growth these past few years and we will always make the best decision for the long-term increase in shareholder value.

We’ll continue to build Hillenbrand as a global industrial products company with an emphasis on customer and geographic diversification to balance risk and growth. As I said last call, the Coperion acquisition is the latest step in this strategy and while evaluating acquisition candidate companies is a continual process, we have a lot to keep us busy right now as we remain focused on the Coperion integration process.

Our goal continues to be that we will implement our strategy to result in revenue growth and profitability. Our focus is on strong cash generation that strengthens our balance sheet and enables us to execute this strategy and we’re committed to being very careful stewards of the company and to provide meaningful value to our shareholders.

Now for our Q&A session we’ll be joined today by Process Equipment Group President, Joe Raver, who’s in Zurich, Switzerland and Batesville President, Kim Dennis. Now we’re ready to take your question and Stephanie, would you please open the lines.

Question-and-Answer Session

Operator

Thank you ladies and gentlemen. (Operator Instructions) Our first question comes from Daniel Moore from CJS Securities, your line is open.

Daniel Moore – CJS Securities

Good morning.

Kenneth Camp

Good morning Dan.

Daniel Moore – CJS Securities

Can you talk a little bit about the tone and direction of activity in Process Equipments? Can --Last quarter you talked about fiscal cliff related fears and maybe give us a sense for whether or not, you felt about cautious tone in your comments on some of your end markets, so are you seeing any improvement or pick up, now that we have gotten past that? And do you still expect mid single digit type organic revenue growth in the Process Equipment Group for 2013?

Kenneth Camp

Yes Dan, I’ll give you a sort of high level look at what we see both here and in Europe especially, and then turn it over to Joe who is much closer to this than I am. We monitor a number of manufacturing organizations and others sources that try to find out what percent of it is, especially because so many investors and frankly so many business people are not sure what the rules are going to be and they are not sure what the conditions are going to be in the future. So, that’s what we think we’re seeing in the couple of the markets that we serve is not that we’re getting orders cancelled, it’s that people are saying a little more time to make this decision. Probably a bit more prevalent right now in Europe than it is in the U.S. Joe you’ll drill down a little bit on that?

Joe Raver

Sure, I think what you said is exactly right Ken, we would have certainly feeling uncertainty in the economy as Canada said it’s more pronounced and it’s been lasting longer in Europe. We’ve seen more activity in China specifically. The U.S. as you know there’s been a lot of uncertainty in the U.S. and we’re beginning to feel that that is starting to ease a little bit, but generally the economy is not terrible right now, but it’s certainly not as robust as it was coming out of the last downturn. And then from an end market perspective as Ken mentioned, we saw a big pull ahead in (inaudible) equipment in 2012, and that will not repeat in 2013 as the supply and demand get back into equilibrium. But we remain very bullish on that market, both in U.S. and ultimately around the world, as we go forward.

Cynthia Lucchese

I just want to just want to jump interrupt quickly and mentioned to you that yes, we do still anticipate the low single digit growth for the non- Coperion Process Equipment Group revenue in 2013.

Daniel Moore – CJS Securities

Perfect. Thank you and switching gears a little bit to Batesville, obviously a very strong quarter. Have a little bit of an easy comp last year revenue up 4%, gross margin that was down slightly year-over-year, Cindy you mentioned some of the cost there that may have favorably impacted last fiscal Q1, can you give us a little bit more detail and whether or not you expect to see gross margins perhaps improve modestly from here throughout the year.

Kimberly Dennis

Hi Dan, this is Kim. Last year, when we made those we made to a number of onetime favorable adjustments or adjustments that will not repeat in this coming year around some of our policies and procedures. And then, those were never heard of about 1.3 million on the margin line last year for Q1. So, when you take those and some other benefits that will not repeat in Q1, you really are pretty comparable quarter to quarter.

Daniel Moore – CJS Securities

Perfect, that’s helpful.

Kimberly Dennis

The adjustments that we pay is an adjustment of the cost that we took out over several quarters last year those really coming through, as we’re operating at lower volume and still at those we’re able to return to the margin levels that we’ve been historically seeing.

Daniel Moore – CJS Securities

Very helpful and finally, in the competitive environment in caskets, you’ve seen previously during last year there was some discounting going on. Given that the market has stabilized a bit, is the competitive dynamic improved at all?

Cynthia Lucchese

Well, most certainly I think that dynamic will be a long term dynamic that we will continue to see. Volumes are, we are in a continually declining market, back now to normal levels, but as some of the smaller competitors continue to fight to hang on to volumes, you’re going to see that they will continue to do discounting. I think this quarter, everyone’s been really racing hard to serve the needs of our customers as we go into our busy time of the year here. But most certainly people want to hang on to the customers that they have and the agreements that they have and I don’t think we should expect to see any lighting of that over the coming quarters.

Daniel Moore – CJS Securities

And with the strong flu season upon us, any risk that you’ve cut too hard in terms of capacity or you feel comfortable with the ability to service?

Cynthia Lucchese

No, I’m glad you asked that question. We do feel good about where we are right now. Of course we’re working extra hours as I’m sure many in this market are, certainly our customers are. But we feel that when we made the adjustments that we made a year ago, we made those adjustments with keeping in mind what we refer to as a bracket of responsiveness, which means we understand generally the fluctuations that the markets price sees over the course of a year, and so we take into consideration those types of things when we adjust our capacities, so that we’re able to respond through overtime and through weekend work, through adjustments in our inventory levels, all the respective things that we used to respond to changes and fluctuations in the market spending. So, while we certainly are working extra hours now, we are in a good position in terms of responding to the customer’s needs as they serve those (inaudible).

Daniel Moore – CJS Securities

I’ll jump back in queue, thank you very much.

Operator

(Operator Instructions) Our next question comes from Steve O’Neil from Hilliard Lyons, your line is open.

Steve O’Neil – Hilliard Lyons

Good morning, Cindy you all reported about $5.1 million increase in casket sales, I wonder if you could break that down between price volume and currency?

Cynthia Lucchese

Sure, absolutely. So volume was $3.7 million, and then the mixed impact was $1.6 million, and currency was about $400,000.

Steve O’Neil – Hilliard Lyons

400,000 negative?

Cynthia Lucchese

No, positive.

Steve O’Neil – Hilliard Lyons

Okay, that exits a little more okay, on that ground, okay. Also what were CapEx in the quarter?

Cynthia Lucchese

CapEx was $5.6 million.

Steve O’Neil – Hilliard Lyons

Okay, and you mentioned that the Process Equipment was down slightly adjusted for Coperion, can you tell me, how much -- that means Coperion probably added about $70 million. Can you give me the number that added for a month?

Cynthia Lucchese

We do not plan on disclosing separately underneath the process equipment group how each one of those is performing Steve, but you can do your calculations and come to a conclusion.

Steve O’Neil – Hilliard Lyons

Okay, did Coperion only limited for a month between the quarter, so did it have any impact on earning positive or negative?

Cynthia Lucchese

Well, Coperion had a positive impact on earnings on adjusted basis, but remember that we had the impact of the backlog, we also had to end the inventory step up as well as the acquisition expenses that we had in the quarter, so there is a lot going on but, net of all those kinds of things, we absolutely had a positive impact.

Steve O’Neil – Hilliard Lyons

Okay, great. Thank you.

Operator

We have no more questions, so I’d now like to turn the call back over to Chris Gordon for final remarks.

Chris Gordon

Once again thank you for joining us today. And we look forward to speaking with you again in May for our next quarter’s call when we will discuss our second quarter results. Have a good rest of the day everyone.

Operator

Thank you ladies and gentlemen, that does conclude today’s conference. You may all disconnect and have a wonderful day.

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