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Executives

Mark R. Lanning - Vice President Investor Relations and Treasurer

Kenneth A. Camp - President, Chief Executive Officer, Director

Joe A. Rover – President Batesville Casket

Cynthia L. Lucchese - Chief Financial Officer, Senior Vice President

Analysts

Jamie Clement - Sidoti & Company

Clinton Fendley – Davenport Securities

Hillenbrand, Inc. (HI) F1Q10 Earnings Call February 4, 2010 8:00 AM ET

Operator

Welcome to Hillenbrand’s earnings call for the first quarter of 2010. Today’s conference is being recorded and will be available for replay through Midnight Eastern Time Thursday, February 18, 2010 domestically at 888-203-1112 and internationally at 719-457-0820. For the replay, callers will need to use confirmation code 6311654. If you’re unable to listen to the live audio only webcast it will be archived at www.HillenbrandInc.com through February 4, 2011.

If you ask a question today it will be included in any future use of this recording. Also note that any record, transcript or other transmission of the text or audio is not permitted without Hillenbrand’s written consent. Now, at this time it is my pleasure to turn the conference over to Mark Lanning, Treasure and Vice President of Investor Relations.

Mark R. Lanning

Welcome to our earnings call for the first quarter of 2010 which ended December 31, 2009. With me today are Hillenbrand President and CEO Ken Camp; Batesville Casket President Joe Rover; and Hillenbrand 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 risk described in the documents we file with the Securities & Exchange Commission such as our annual and quarterly reports on Form 10K and 10Q. We do not undertake any obligation to update or correct any forward-looking statements.

Now, let me provide some information regarding our call. We have scheduled an hour and will start with prepared remarks that should last approximately 15 to 20 minutes. We will then move directly to question and answer. If you have any follow up questions after the call has ended, please don’t hesitate to call me at 812-934-7256 or email me at MRLanning@Hillenbrand.com.

Now, it’s my pleasure to turn the call over to Ken Camp, Hillenbrand’s President and CEO.

Kenneth A. Camp

I’ll start today’s call with a brief overview of our performance for the first quarter. Then, I’ll turn the call over to Joe Rover, President of Batesville Casket Company who will talk to you about Batesville’s business and the funeral services industry in general. Cindy Lucchese will then provide details about our quarterly financial results. After the prepared portion of this call Joe, Cindy, Mark and I will be available to take your questions.

As you read in this morning’s press release, Hillenbrand is reporting a 3% decline in revenue for our first quarter of 2010. While I am certainly not satisfied in reporting a drop in quarter-over-quarter results, I am encouraged that this is our third consecutive quarter of improving revenue comparables since the economic meltdown nearly a year ago. I believe that you’ll see more consistent and favorable revenue comparables as the year goes on.

We have a clearer picture of whether the economy is returning to more normal levels and how consumers are choosing to respond. A positive effect of the current economic challenges is that some commodity prices have returned to more normal levels compared to the very high commodity prices we experienced in 2008 and most of 2009. In addition, our core operating business, Batesville Casket is well schooled in lean business practices that enable them to effectively manage costs.

These factors help us once again increase our gross profit margin percentage for the quarter, this time by 270 basis points over the same period in 2009. We mentioned on our last call that operating expenses would increase as a result of fully accruing for our short term incentive comp plans and the impact of pension expense and they did. This was offset by the favorable effect of a onetime sales tax adjustment. Cindy will describe this in greater detail in her remarks.

Combined with other favorable factors such as lower spending on antitrust litigation offset by some new costs of our planned acquisition of K-Tron International, earnings per share increased 11.6% for the quarter going from $0.43 to $0.48. Our operating cash flow remains strong in the opening months of 2010, increasing more than 56% over 2009. We used a portion of that cash to uphold our commitment to providing shareholders with meaningful returns increasing our annual dividend by $0.01 per share just as we did last December.

Now, I’ll turn the discussion over to Joe Rover for a more detailed description of results at Batesville Casket.

Joe A. Rover

I’ll begin today by reviewing the current funeral service environment and how it impacted our first quarter results. Then, I’ll spend a little time updating you on a number of our key strategic initiatives. Our analysis shows that North America deaths continue to decline compared to the same period a year ago. Generally the incidence of pneumonia and influenza are key factors in determining the total number of deaths in the first two quarters of our fiscal year.

While the Centers for Disease Control did report unprecedented numbers of outpatient visits for flu like symptoms in the opening months of 2010, most of the visits were a result of the H1N1 virus which has a very low mortality rate. Late in the quarter though we did see a modest spike in deaths associated with seasonal influenza but this spike was not enough to offset lower overall mortality rates in the general population.

In addition to a lower number of deaths, we believe the year-over-year rise in the cremation rates for the quarter was higher than it has been historically. As we’ve discussed in previous calls, the economic crisis led consumers to seek lower cost funeral alternatives which in turn cause the growth in the cremation rate to spike in the second and third quarters of 2009. We’ve seen it moderate somewhat over the past two quarters but it still remains above the historical increases of approximately 120 basis points. Looking ahead, we believe the cremation rate will continue to normalize but the fact is over time, cremations will continue to grow to replace burials.

As a result of lower deaths and higher cremations, burials are down for the quarter over the prior year. This lower burial volume was the primary driver of our 3% decline in revenue. Even with the combination of lower demand and the challenging economic environment, our average selling price remained relatively flat in the first quarter compared to the prior year. After a difficult period in the second and third quarters of last year, we’ve now seen pretty stable average selling prices for the past seven or eight months.

Now, I’ll turn to our strategic initiatives. In the current environment there are several things we can do to continue to improve performance. First, we continue to identify and implement improvements to our cost structure that allow us to be more efficient and effective without sacrificing any of the quality and services our customers expect. We’ve built lean business improvement in to our plan and the focus efforts of our supply chain team have helped us meet our cost performance targets while at the same time we’ve been reinvesting in our business to improve material flow, product quality and visual management systems.

On our last earnings call I talked with you about a number of our market focused strategic initiatives in some detail and today I’d like to update you on a few key areas. You’ll notice that each of our initiatives is focused on improving the ability of our customers to serve their client families which in turn improves the performance of Batesville Casket Company.

I’ll start with the status of the new products that we introduced at the National Funeral Directors Association Convention in October. One of the first things that sets our products apart is the level of personalization we provided to families. With our life story series of caskets, families display high quality bronze medallions in the cap of the casket to highlight a loved one’s interest and values. Keep sake medallions then help to memorialize that loved one after the service is complete. The life view panel caskets also make use of interior casket caps to give families the opportunity to display treasured photographs and mementos during the service. Both of these products have been extremely successful in the first quarter.

Another area of focus has been growing our range of Batesville interactive products and services. We’ve completed the initial hiring required to support our 2010 online initiatives which start with maintaining our status as the world’s largest creator and host of funeral home websites. Through our connectivity suite we’re enhancing those sites by offering funeral homes additional functionality and avenues for income.

We introduced two products at the National Funeral Directors Association Convention this year including tribute link which let’s funeral directors and families create and share online video tributes that can also become part of the service. The other products we previewed in October was ObitLink which was formally launched in mid January. Through an alliance with Legacy.com our customers will have access to the largest obituary network in the nation.

We’ve been pleased with the partnership with Legacy.com on the obituary project and plan to continue exploring the possibility for additional partnerships and acquisitions in other areas of death care. We’re constantly seeking opportunities that will generate growth for us and at the same time enable our funeral home customers to better serve their families.

Revenue in our options line of cremation products was essentially flat in the first quarter compared to last year. Consumers continue to spend cautiously in this category putting pressure on the average revenue dollars per cremation service. Our team is focused on driving innovative new products that help families memorialize their loved ones in personal and unique ways. Then, we work to help funeral directors merchandise both products and services in a way that let’s families see the value in selecting better service options.

We also continue to drive ongoing improvements in sales force effectiveness to ensure that we’re making the most of every sales call by delivering the right message to the right customer with the right frequency. A key component of our messaging continues to be merchandising. Merchandising has a positive impact on both average selling price and customer retention and perhaps more importantly results in increased satisfaction as families make more informed and meaningful product choices.

While the first quarter of 2010 didn’t start out with a favorable year-over-year results we would have liked, I believe that going forward we’re going to see comparisons that more accurately reflect the current state of the industry, the economy and our companies core competencies. We believe our strong customer orientation and focus on lean business practices have positioned us well for continued growth and leadership in our industry not just in 2010 but for our next 100 years in funeral service.

Now, I would like to turn the discussion over to our Chief Financial Officer Cindy Lucchese.

Cynthia L. Lucchese

Today I’d like to share some further detail and perspective around our first quarter results. Net revenue for the quarter was $161.5 million, a decrease of $5 million or 3% from the same period in the prior year. Lower burial volume continues to be the primary driver for the decrease in revenue. This is mostly related to fewer deaths and an increase in cremations year-over-year. Additionally, during the same period our average selling price was essentially flat versus the prior year.

Finally, we experienced a favorable impact of currency fluctuations during the quarter from the weakening US dollar mainly compared to the Canadian dollar resulting in increased revenue of $1.4 million over the same period in the prior year. At 44.6% our gross profit margin percentage improved 270 basis points over the 41.9% we posted in the first quarter of 2009. Cost of goods sold decreased $7.2 million or 7.4% versus the prior year.

Commodity costs, most notably steel were down for the quarter by $4.2 million. In our distribution operations we benefited from a $200,000 reduction in fuel costs and a $1.2 million reduction in other distribution related costs. Operating expenses in the first quarter totaled $30.9 million flat with the prior year. This quarter's results include $2.8 million in business acquisition costs, minimal spending for ongoing antitrust litigation and an increase in expenses of approximately $1.7 million primarily for compensation costs.

These increases were mostly offset by a non-recurring adjustment of $4.1 million related to sales tax overpayments made in previous years. No prior or current annual periods were materially affected by these overpayments and they had no impact on prior billing to our customers. We expect to collect these overpayments over the next 12 months.

Interest expense for the quarter was down nearly $1 million driven by a decrease in the weighted average interest rate on the credit facility from 3.3% to .7% combined with the lower average principal balance. During the first three months of 2010, we used existing cash to pay off our $400 million revolving credit facility. Now, if you recall, after the spin from our former parent company, we had net debt of $125 million which we’ve completely retired in just 21 months.

As of December 31st we had $6.7 million in outstanding undrawn letters of credit under our revolver and had $393.3 million of remaining borrowing capacity. We also recorded $3.7 million in investment and other income for the quarter essentially flat compared with the first quarter of 2009. Our tax rate for the first quarter was 34%, down 2% from 36% a year ago. The decrease is primarily attributable to a favorable true up adjustment of our income tax accounts to filed income tax return.

Net income for the quarter was $29.5 million, an increase of 11% over the same period in 2009. Earnings per share increased more than 11% in the first quarter from $0.43 per share in 2009 to $0.48 in 2010. Excluding costs of $2.8 million related to acquisitions and $200,000 related to the antitrust litigation costs along with the $4.1 million tax adjustment I talked about earlier, our adjusted net income for the quarter was $28.7 million. This represents an increase of more than 6% compared with adjusted net income of $27 million in 2009. Adjusted earnings per share increased 4.5% from $0.44 in 2009 to $0.46 in the first quarter of 2010.

Cash flows from operations remains strong in the first quarter at $36.4 million up 56% from $23.3 million in the prior year. Most of this difference was driven by lower spending and the timing of accounts payable disbursements. Finally, we are reaffirming the guidance we issued during our last earnings release on November 24th. Our current guidance does not include the financial affects of any acquisition or transition activity including the pending acquisition of K-Tron International.

Once that deal is complete we expect to review guidance and we’ll issue our determination possibly as early as our next earnings call tentatively scheduled for May 6th. Now, I’ll turn the call back to Ken for his concluding remarks.

Kenneth A. Camp

Before I wrap up I want to give you a brief update on last month’s announcement that Hillenbrand is acquiring K-Tron International. At present we expect the K-Tron shareholder proxy will be filed very soon with a shareholder vote expected to occur sometime around late March depending on the time required for potential SEC review. You will see an announcement from us when the deal closes.

To sum up, we’ve had a strong start for fiscal 2010 especially when comparing to a solid Q1 last year. While we’re pleased with the quarter’s results, we’re certainly not satisfied at this point. However, Joe and the Batesville Casket team continue to produce strong cash flow, build upon their growth strategy and leverage lean business principles to make ongoing costs improvements. At the same time we are working diligently to close on an acquisition that will provide our enterprise with more opportunities to grow and create additional shareholder value in years to come.

Thanks again for joining us on the call today. Now Joe, Cindy, Mark and I will be glad to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jamie Clement - Sidoti & Company.

Jamie Clement - Sidoti & Company

Ken, the remarks in the press release and in your prepared remarks as well, obviously you saw some improvement in business trends towards the end of fiscal 2009. In the press release I think you allude to you may see some signs things are returning to normal patterns. Are those more normal patterns in your December quarter results here or is that something that is a little bit more recent as the weather has gotten colder?

Kenneth A. Camp

Well of course we’re reporting only on the December quarter but I think as we’ve mentioned a couple of times some of the patterns we look at obviously are the choices that consumers make. When we saw the tremendous affect on the casket business of the economic meltdown in our Q2 of ’09 cremations spiked up to more than double the growth rate that we have been experiencing. We’re seeing that come back to much more normal levels at this point. Not exactly at the 120 basis point level that it was growing before but we’re liking the trend in the way consumers make decisions there.

The other element is our average selling price and that took a hit at the same time. That’s been returning nicely and it seems to be a bit more stable now. A lot of that has to do with the work that Joe’s team is doing with our customers on merchandising and related activities.

Jamie Clement - Sidoti & Company

Cindy if I may, am I right that you said operating expenses there’s been a $1.7 million increase as a result of the comp expenses that you guys were talking about on the last quarter that you expected to see this year? Is that the right number?

Cynthia L. Lucchese

That is the right number.

Jamie Clement - Sidoti & Company

Obviously this is going to depend on how well you do and everything but kind of for modeling purposes looking out for the rest of the year is that a good number to kind of base assumptions off, the $1.7 we saw this quarter or are there seasonal spikes?

Cynthia L. Lucchese

There should not be seasonal spikes. Remember in the $1.7 that’s a combo of a number of things including the comp adjustment but there are some other items in there such as pension which we had mentioned before. But, I think that would be reasonable [inaudible].

Operator

Your next question comes from Clinton Fendley – Davenport Securities.

Clinton Fendley – Davenport Securities

Obviously a strong quarter here, a nice beat on the bottom line, any particular reason why the decision to leave the guidance in check for the remainder of the year?

Cynthia L. Lucchese

Yes, Clint basically what we’re doing is we’ll come out I think I mentioned in the script in May to give you a better flavor for the year. With the pending acquisition of K-Tron we thought it made a lot more sense to visit guidance at that point in time. And, I think the other thing is typically our second quarter is really the big quarter of the year for us if you think about the flu season, etc. and so it would make a lot more sense as well to think about any changes in guidance after we get through that quarter.

Clinton Fendley – Davenport Securities

Any comment just as we think about the flu season and volumes just what you’ve seen in the most recent month since the close and how you’re thinking about how the season may shake out?

Joe A. Rover

What we saw in the first quarter as we said is we saw a big spike in the number of doctor visits due to the flu and normally that leads to increased mortality associated with the flu but in this case it was really H1N1 related and that has a low incidence of mortality so we didn’t really see much of a spike in the mortality associated with the P&I. We got a little upside at the end of the quarter but again, it wasn’t enough to offset the overall decline in the mortality rate in the general population.

In terms of what’s happening today through January, you can look at the numbers out on the government’s flu website and see there’s a little bit of a bounce up and down but no major spike in the flu like we saw in 2008. It’s just so hard to predict what’s going to happen, whether we’re going to see a big spike in the flu or not but the longer the year goes on the less likely the chance of that happening becomes. I don’t know if that answers your question but the first quarter we didn’t really see much at all in terms of a spike in the flu.

Operator

I do show we have no further questions at this time. I will now turn the call back over to Mark Lanning for any additional comments or closing statements.

Mark R. Lanning

That concludes today’s conference call. We’d like to thank everyone for their participation and calling in. Have a good day.

Operator

That does conclude today’s conference and we thank you for participating.

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Source: Hillenbrand Inc. F1Q10 (Qtr Ending 12/31/09) Earnings Call Transcript
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