Hillenbrand, Inc. F1Q09 (Qtr End 12/31/08) Earnings Call Transcript

| About: Hillenbrand, Inc. (HI)

Hillenbrand, Inc. (NYSE:HI)

Q1 2009 Earnings Call

February 6, 2009 8:00 am ET


Mark Lanning – VP IR

Kenneth Camp – President & CEO

Cynthia Lucchese – SVP & CFO


Jamie Clement - Sidoti & Company

Clint Fendley - Davenport

Jack Ripstein - Portrero Capital


Welcome to Hillenbrand’s earnings call for the first quarter 2009. (Operator Instructions) Now at this time it’s my pleasure to turn the conference over to Mark Lanning, Treasurer, and Vice President of Investor Relations.

Mark Lanning

Good morning everyone. With me today are Kenneth Camp, Chief Executive Officer, and Cynthia Lucchese, Chief Financial Officer. We would like to welcome you to our first quarter 2009 earnings call.

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 have scheduled one hour and will start with prepared remarks that should last approximately 20 minutes. We will then move directly to Q&A. If you have any follow-up questions after the call has ended, please don’t hesitate to phone me at 812-934-7256 or email me at mrlanning@hillenbrand.com.

Now it is my pleasure to turn the call over to Kenneth Camp, the President and CEO of Hillenbrand, Inc.

Kenneth Camp

Thanks Mark, good morning everyone and thank you for joining us on our call this morning. We will be talking about a number of items starting with highlights of our performance for the first quarter of fiscal 2009 which ended December 31.

I will give you a brief overview of our results and how we performed in the current economic climate as well as a progress update on some of our key initiatives. I’ll then turn the call over to Cynthia Lucchese for details about our quarterly financial results and then I’ll wrap up the prepared portion of our call this morning with some closing thoughts.

Following that Cynthia and I will be available as always to take your questions.

Our first quarter results were very solid with net income growth of 10.4% and a commensurate increase in earnings per share. Net revenue increased modestly at 2.2% and gross margin improved 80 basis points to come back into line with our historic margin performance.

Also in the first quarter cash flow from operations increased 2.6% to $23.3 million and we repurchased shares worth $6.25 million. Additionally in an environment where many companies have cut or eliminated their dividends in December we increased our annual dividend by $0.01 per share to an annual level of $0.74 per share.

This is consistent with our previously stated commitment to return a meaningful portion of our strong cash flow to shareholders and to reinvest a similar amount in growth initiatives. Cynthia will soon give you an in depth look at our financial results and some of the key drivers behind them, however I’ll first give you a quick look at our growth initiative within the Batesville Casket Company.

Let’s start with a little background for those who may be new to our call, our products aren’t purchased on a discretionary basis by consumers. Our funeral home customers, some 16,000, generally order a casket from us immediately after a family has selected a casket. The number of funerals that involve a casket is driven by the number of total deaths in a given period and slow but offsetting effect of the steady increase in cremation.

The number of deaths in the first quarter and carrying into January has been lower then we would normally see in this period in line with what we’ve heard from other public company reports. In addition we haven’t seen the typical seasonal increase in deaths resulting from influenza and pneumonia and indications from the US Center for Disease Control and other sources, are that this year’s flu vaccine has been very effective at reducing the incidence and severity of influenza and resulting pneumonia.

This means that the typical spike in mortality has not emerged. It is possible for an increase to occur yet in the typical winter season, but our data suggests that this will be a year of more steady demand. Because no one can accurately predict the demand for caskets, certainly not in the short-term, our business model is to provide our funeral home customers with consumer tested products and support systems that enable families to select a casket that best fits their needs.

This process is based on the experience that a well-informed consumer makes a better buying decision. And that really leads right into one of our primary initiatives, what we refer to as merchandising. The heart of this process of providing consumer the right products and the right information is the Batesville merchandising system.

Throughout 2008 we talked a lot about what merchandising is and why we believe its important for incremental growth. Approximately one-fifth of our independent buying accounts are merchandised to some degree. In this quarter funeral homes that have implemented a merchandising system outperformed those that haven’t by double-digits compared to the prior year. This is consistent with the results we’ve seen in the past several quarters as well.

Its clear to us that merchandising benefits our customers, their client families and our company and our challenge is to help more funeral homes adopt the Batesville merchandising system and realize its financial and customer satisfaction benefits.

Related to merchandising is the way we develop new products that funeral directors can show to families and our new product development efforts are focused on those price points and product types that part of an effective merchandising assortment.

In the fall we launched nine new casket products all positioned at or above our current average sale. These individual models help our customers become more profitable and increase the satisfaction of their client families and we’re pleased with the performance of these new products and the results they can bring to well merchandised funeral homes.

Another initiative we have is our North Star product line. This is a line that offers us the opportunity to sell the independent distributors, a channel we did not participate in until just a couple of years ago. This product line provides high quality products which are very distinct from Batesville models and carry none of the proprietary Batesville features.

But products that also have reliable and timely delivery enabling us to compete effectively against low price entrance in the channel including Chinese made caskets. While North Star gives us an avenue for growth these models by their very nature are lower priced, they are generic, and they do have a somewhat dilutive effect on the average mix.

North Star revenues in the quarter continue to grow at the expected rate and although this is still a small part of our overall revenue base we’re pleased with these results and this will continue to be an important strategic focus for us.

Despite the fact that our business and our industry has historically been resistant to the economy’s ups and downs there are some areas where we felt the squeeze. At the end of fiscal 2008 we absorbed a great deal of extra costs due to high prices in fuel and commodities. Diesel fuel costs have abated somewhat for the time being, and steel costs also have declined, although we still face high costs in carbon steel in the first quarter of 2009 primarily because of existing steel contracts.

We are in the process of renegotiating these contracts and expect to see somewhat lower prices beginning in the third quarter although we still have a sizable amount of higher cost inventory that needs to work its way through the system.

We’re also acutely aware that steel producers and OPEC are staying up nights trying to figure out how to take their prices up again. Both groups have made it clear that they intend to reduce capacity and that gives commodity prices a very uncertain future.

The final point I’d like to touch upon this morning is our previously announced strategy to grow through acquisitions and business alliances. As you know our plan is to evaluate acquisition opportunities that would enable us to use our core competencies, either in related death care businesses or in other industries and we’re working diligently to establish these processes and identify attractive opportunities.

I want to emphasize that we’re going to be a patient and disciplined buyer and we will stay on the sidelines when its prudent and when we have something to report, we’ll do so.

Now I’d like to turn over the discussion to our CFO, Cynthia Lucchese.

Cynthia Lucchese

Thank you Ken, I’d like to provide some additional detail and perspective behind our first quarter results.

Sales for the quarter were $166.5 million, a $3.6 million increase over the same period in the prior year. This positive revenue growth in an otherwise marginally declining burial market was driven by higher average revenue per unit. In addition burial unit volume decreased 1.5% compared to last year which reduced revenue by $2.7 million.

Unfavorable foreign exchange rates particularly with the Canadian dollar also reduced revenue by $2.4 million over the same period in the prior year. Our gross profit margin percentage of 41.9% improved 80 basis points versus 41.1% a year ago.

Higher ASP was also the primary driver for this improvement which helped to counteract an increase in material costs of $2.5 million. Additional factors in the quarter’s results reduced costs by another $1.3 million primarily through productivity cost savings resulting from our continuous improvement efforts as well as lower distribution costs.

Operating expenses increased $3.5 million year-over-year to $30.8 million excluding one-time separation costs. The majority of this increase was related to $5.9 million in additional operating expenses from building the infrastructure necessary to function as a stand-alone public company.

These costs were partially offset by the discontinuation of cost allocations from our former parent company of $2.5 million in the prior year. Legal fees for the outstanding antitrust lawsuit decreased $400,000 compared to the first quarter of 2008.

We incurred $1.1 million in interest expense for the quarter compared to no interest expense for the same period in the prior year. As you may remember we only began to pay interest expense in the second quarter of 2008 when we made borrowings under our revolving credit facility. Our outstanding borrowings on December 31 were $100 million under our $400 million revolver.

Our average borrowings for the quarter were $102.1 million at an average interest rate of 3.3%. Investment and other income was $3.6 million in the quarter versus a negative $400,000 in the prior year primarily from interest earned on auction rate securities in the Forethought note. We also recorded a $3.7 million gain on the Put right we received from UBS as well as a $3.8 million loss when we transferred the related auction rate securities to the trading category.

Both the UBS Put right and the corresponding investments are recorded at fair value and will be adjusted to reflect fair value on a quarterly basis. We expect that these values will substantially offset each other and that any related volatility in our income statement will be minimal.

Our tax rate for the first quarter was 35.9% which is 0.9% lower then in the prior year largely due to separation costs we incurred a year ago that were not deductible for income tax purposes. Net income for the quarter was $26.5 million or $0.43 per fully diluted share. This was an increase of more then 10% over the same period in 2008 with net income of $24 million or $0.39 per fully diluted share.

Cash flows from operations at $23.3 million were up slightly over the same period last year at $22.7 million. First quarter last year we were still a part of our former parent company. As a separate public company there are some differences in our cash flow most notably we now incur our own noncash related expenses such as stock based compensation and we also receive noncash earnings such as the interest income from the Forethought note.

In addition we pay our own dividends and taxes. However even with these additional factors our cash flow is strong and steady and continues to provide us with opportunities to build shareholder value and return a meaningful amount of that cash to investors.

Now I would like to turn the call back to Kenneth for his concluding remarks.

Kenneth Camp

Thanks Cynthia, to sum up the first quarter this year we’re pleased with our ability to continue providing solid positive results in a challenging economic environment and we believe that our core principals of customer satisfaction, continuous improvement in all aspects of the business and managing the company for cash flow will serve us well during these times.

Thanks for joining us on the call today, and Cynthia and I will be glad to take your calls.

Question-and-Answer Session


(Operator Instructions) Your first question comes from the line of Jamie Clement - Sidoti & Company

Jamie Clement - Sidoti & Company

Just to follow-up some of your prepared comments here, obviously the Canadian dollar hurt your revenue a little bit, but this was a quarter where there was obviously a ton of disruption in the general economy but you back out the Canadian dollar effect, is it safe to assume that you are seeing from your customers and your customers’ customers that those people are pretty much willing to spend what they would historically spend when their family needs a casket?

Kenneth Camp

That’s the key question I think everybody in every business is looking at and as most people know the funeral services industry has been generally quite stable and has historically demonstrated very strong resistance to economic cycles and what we’re seeing at this point including our results and the trap lines that we run out there with our customers say that this pattern remains consistent.

However I think all of us have to recognize that these times are certainly unprecedented at least in the last 50 years or so and we live in a world where even the tiniest bit of news gets instantly broadcast around the world so sometimes I wonder if some of it isn’t just a strong echo. But that said, we have to look with caution at the trends we’ve had and we’ve set up systems whereby we can get early warning indicators from our customers about what they’re hearing from their families.

Thus far in our surveys with customers and individual conversations, they are not seeing a change in how families behave. But we all have to caution if as the situation worsens or maybe as the economic medicine has a high cost, that could change. We’re just being alert to it.

Jamie Clement - Sidoti & Company

Just with respect to the cost side, you a couple of months ago offered a projection for profession fees related to litigation, you didn’t spend much money compared to the number you through out there for the full year during this quarter, can you give us an update of where that process is and whether we should in fact be expecting to see bigger numbers in the next couple of quarters?

Kenneth Camp

I hope everyone has had a chance to look at the document that was put forth by the Magistrate Judge which is his memorandum and recommendation. That goes to a District Judge. That’s on our website by the way if anyone wants to read those two documents. And here’s where the process is, once that is put forth the District Judge has given the Plaintiffs and the Defendants an opportunity to respond.

The Plaintiffs will in essence file a document saying here’s why they think that that should be reconsidered and we have responded to that and its now awaiting the consideration of the District Judge to determine if he will issue an order in line with the recommendation or some other kind of order.

The next step there which we are prepared for is that the Plaintiffs would appeal if it doesn’t go their way and I guess we would appeal if it doesn’t go our way. So we expect that to play out in upcoming weeks or months although quite candidly these things do seem to take a long time.

What will spend? The timing is really the driver of the spending and the fact that if there’s an appeal that raises our spending cost over zero throughout this year. As you go through the year, every day that passes, every week that passes decreases the likelihood that we will spend the number that we originally put in. What I’m suggesting is that people sort of look past that and make some rough calculations. As soon as we know something, we’ll get it out.


Your next question comes from the line of Clint Fendley - Davenport

Clint Fendley - Davenport

I wonder if you would be able to quantify the fuel impact for the quarter, how you benefited there?

Cynthia Lucchese

It was about $300,000.

Clint Fendley - Davenport

Did you give the dollar impact from on revenue from both the mix shift and the price realizations?

Cynthia Lucchese

Price was a little over $11 million and mix was about $2.5 million unfavorable.

Clint Fendley - Davenport

I wonder if you could comment for a moment on just how the competitive pressures may have changed in the environment that we’re in currently, anecdotally in some of the trade magazines I’m reading where some of the independents are beginning to take a look at alternative suppliers and if you’re seeing any pressure there and how you might react in an environment such as this.

Kenneth Camp

This is a very competitive industry, I think everyone knows that there is excess capacity that’s chasing business and what we find when, especially when the flu season doesn’t come, when sales at companies would normally look for in the winter season don’t materialize they usually [inaudible] it with price. The competitive discounts go up, spot discounts generally to win over customers and that battle was raging when I arrived here 28 years ago and I imagine it will continue.

We do our best to compete on quality, service, and merchandising to help funeral directors increase their profitability and their client satisfaction. We certainly think that we are price competitive but it is not our intention to be the lowest priced provider out there.

So we’re constantly metering that, we’re constantly looking at what’s going on. We think our customers do as well. If there’s a bottom line message in it that we try to put out, it is that funeral directors make more money selling caskets then they do buying them and when they have caskets that families can select from and see high value in they’re better off financially.


Your next question comes from the line of Jack Ripstein - Portrero Capital

Jack Ripstein - Portrero Capital

I was curious the economic environment is getting tougher, are any of your customers, are you seeing any kind of going out of business or having a tough time especially with the cold and flu season you mentioned not being as strong as anticipated and also any of your competitors under any sort of financial duress in this environment.

Kenneth Camp

We don’t have hard data on either one, funeral homes are generally very well rooted in the community, often don’t carry a lot of debt so they can withstand some economic difficulties. We also try to be very understanding when a flu season doesn’t come recognizing that our customers may have a little pinch with cash flow and we’ll be very understanding with them.

We think about our relationship with them in terms of decades not quarters. But we’re not getting big signals. I think everybody is trying to watch their budget. We don’t know very much about other then publically traded company, this is a significant competitor of ours, we don’t know anything about the financials of the smaller companies but the reality is scale and scope are attractive assets to have when one is a manufacturer and a distributor so one would have to expect that the very small operators undergo more significant challenges then the larger companies.

Jack Ripstein - Portrero Capital

You’re not seeing dumping from any one competitor who is just really having a tough time or something along those lines.

Kenneth Camp

Haven’t seen it but remember the size of, we’re talking about the three largest companies in the business comprising about three-fourths of the business so for a small competitor to dump it’s a little hard to pick that up anyone’s radar screen.

Jack Ripstein - Portrero Capital

But none of the big ones are having this issue basically.

Kenneth Camp

We have not seen it thus far, no sir.


There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Mark Lanning

We’d like to thank everyone for joining us this morning and if you have follow-up questions please don’t hesitate to give us a call. We will be around all day today or next week, so again thank you for joining us and have a good day.

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