Hillenbrand Industries F1Q08 (Qtr End 12/31/07) Earnings Call Transcript

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Hillenbrand Industries Inc. (HB) F1Q08 (Qtr End 12/31/07) Earnings Call February 6, 2008 5:00 PM ET


Andy Rieth - VP of IR, Communications and Global Brand Development

Peter Soderberg - CEO and President of Hillenbrand and Hill-Rom

Greg Miller - SVP and CFO

Ken Camp - CEO of the Batesville Casket Company


Steven Nisan - Mindflow Capital Investment

Peter Bye - Jefferies & Company

Greg Halter - Great Lakes Review


Good afternoon and welcome to the Hillenbrand Industries conference call. The call will be available for replay through the February 13, 2008 domestically at 888-203-1112 and internationally at 719-457-0820. For the replay callers will need to use confirmation code 4514956.

If you are unable to listen to the live webcast or the replay, the call will be archived at www.hillenbrand.com through February 5th, 2009. If you choose to ask a question today, it will be included in any future use of this recording. Also note that any recording, transcripts or other transmission of the text or audio is not permitted without the written consent of Hillenbrand Industries. (Operator Instructions).

On the call today will be Peter Soderberg, CEO and President of Hillenbrand and Hill-Rom, Greg Miller, Hillenbrand's Senior Vice President and Chief Financial Officer, Ken Camp, CEO of the Batesville Casket Company and Andy Rieth, Vice President of Investor Relations, Communications and Global Brand Development.

Before we begin, I would like to provide Hillenbrand's usual caution that today's call may contain forward-looking statements such as forecast of business performance and company results and expectations about the company's plans and future initiatives. Actual results may differ materially from those projected.

For an in depth discussion of risk factors that could cause actual results to differ from those contained in forward-looking statements made on today's call, please see today's press release.

Also you may reference the discussion under the heading "Risk Factors" in the company's annual report on Form 10-K for the period ended September 30, 2007 filed in December. If you have not received today's release, it's available on Hillenbrand's website, www.hillenbrand.com.

Now I would like to turn the call over to Mr. Andy Rieth.

Andy Reith

Thanks a lot Jamie and good morning everyone. I would like to personally welcome you to this call. We've got a lot to discuss today, so let's jump right in.

I'd first like to provide some information and ground rules for the call in order to make it as efficient as possible. We scheduled about an hour for the call, we'll make some prepared remarks and then move directly to Q&A.

Please limit your inquiries to one question plus a follow-up per person and if you have additional questions, you may rejoin the queue.

Along with our remarks, we are displaying slides real-time that amplify our disclosure. I would encourage you to follow along with us. The slides will also be a part of the archive of this call.

The telephonic audio replay of this call will be available until February 13th and access to information is in today's earnings release. Webcast and the accompanying slides will be archived on our website at www.hillenbrand.com.

Also I would like to note that our 10-Q for the first quarter of this fiscal year will be filed later this week and will serve as a good complement to today's material.

And finally, as we announced on January 16, Hillenbrand Industries filed an amendment to the information statement on Form 10 with the SEC on behalf of Batesville Holdings related to the previously announced separation of our two operating companies. This Form 10 registration statement is posted on the SEC website at www.sec.gov and also can be viewed on the Hillenbrand website at www.hillenbrand.com.

With that, I'll turn the call over to Peter.

Peter Soderberg

Thank you, Andy and good afternoon to everybody. We've got a lot of ground to cover today as the pace of change continues to accelerate at Hillenbrand Industries.

I'd like to begin by briefly reviewing Hillenbrand's consolidated results, and then I'll dive deeper into Hill-Rom's results and outlook before turning the discussion over to Ken and Greg. Later I'll conclude with a brief update on the status of our separation and then we'll take your questions.

Our sales momentum is beginning to build especially Hill-Rom. The first time since quarter two of 2007 all three revenue reporting groups Hill-Rom capital, Hill-Rom rental and Batesville Casket showed year-over-year growth while we still have improvements to make and the fruits of our investments to harvest but actually I'm pleased with our progress.

That said the quarter also demonstrated some areas where our investments and corrective actions have not yet taken hold.

On a consolidated basis, Hillenbrand's worldwide sales of $504 million grew 4.4% versus 2007. Hill-Rom's capital sales showed another strong growth quarter, increasing 8.9% year-over-year.

I'm pleased to report that Hill-Rom's rental revenue for the quarter increased by 1.5% which reflects increasing traction on the turnaround of our North American acute care therapy rental business which should build throughout this year.

Batesville Casket sales of $163 million for the quarter were essentially flat growing 0.4% versus the prior year. Greg will provide some additional segment details later on the call.

Turning to earnings, consolidated net income was $0.72 per fully diluted share. On an as adjusted basis earnings for the quarter were $0.70 a share, a decline of 13.6% versus prior year. Our EPS performance was down year-over-year reflects our continuing commitment to execute the strategies for both companies we announced in October of 2006.

I'm pleased to say that free cash flow was $94.1 million, the highest in over three years and 26% higher than the first quarter of fiscal year 2007.

As we prepared for separation, Hill-Rom in particular is putting much more emphasis on cash generation and working capital efficiency. This discipline has long been a hallmark of Batesville Casket.

We are confident that our investment initiatives made in 2007 and planned for 2008 position both operating companies soon to be separated with successful execution of their growth strategy.

As we stated in our last quarterly call we expect the second half of 2008 to be an inflection point, as Hill-Rom should show the impact of our investments in terms of earnings growth and Batesville Casket will once again demonstrate the predictability of earnings and cash generation you have come to expect even during this period of low deaths and increasing death care industry consolidation.

Now let me discuss the progress of Hill-Rom in advancing our fix and grow strategic initiatives and in delivering on our three-year compounded 6% to 8% sales and 10% to 13% earnings growth goals.

Our first quarter performance of 6.4% sales growth landed within this range. We are maintaining our Hill-Rom guidance for 2008 which will put adjusted earnings growth for the year from a low single-digit to mid-teens level.

By now you should be well familiar with the strategy that we laid out previously and continued to executive. This strategy has not changed since we shared that with you on October of 2006, and we are encouraged for the most part that our view of the market and the opportunities available to us continues to be validated.

In interest of brevity, I will review just a few of the executional highlights of this strategy. Although you can rest assure we remain committed to effectively implementing each one.

Let me now highlight initiatives on three main areas. First, develop and successfully launch differentiated new products. Second, enhance our sales and service channels around the world and across the care continuum. And third, build manufacturing distribution of sourcing efficiencies.

Allow me to elaborate on each of these. We've recently launched and begun shipping four new products I would like to highlight. Two are the highest end of the patient acuity spectrum and two are foundational patient support platforms which will drive Hill-Rom's growth and long-term care and in home care.

These new products reflect the increased R&D focus and spending that we've been describing for the last four quarters. We assume to complete the national roll-out and build-out of our full fleet of the innovative TotalCare Bariatric Plus patient support system.

This platform is designed to provide new levels of care for the bariatric or obese patient and is designed primarily for intermittent hospital ICU and med-surg rentals, although we are starting to see unexpected demand for capital purchase.

Overall sales of bariatric products are growing at mid-to-high teens rates. Bariatric patients require special care and are also at high risk for skin breakdown, pulmonary and other complications.

This new adjustable bed for overweight patients provides progressive mobility with flexible and enhanced wound and pulmonary therapies designed to improve patient safety, comfort and caregiver efficiency.

During the quarter we began our natural roll-out of another mid-to-high acuity platform, the Hill-Rom E700 Wound Surface. This sophisticated wound therapy and prevention replacements service, a product of four years of development can be utilized in many settings and on our own and on other manufacturers' sites. It offers multilingual touch screen simplicity combined with technology to sense patient movement in real time. It automatically adjusts, provides optimal pressure redistribution as the patient sleeps, runs, sits up and gets in and out of bed.

Like the TotalCare Bariatric Plus, the E700 features our proprietary microclimate management technology which provides air flow just below the patient leading to an improved ability to manage heat and moisture.

Bed exit alarms integrated into this mattress help reduce the risk of falls and are an industry first. In Europe, we have recently launched two AvantGuard long-term care beds with matching furniture. This is specifically designed for the diverse needs of medicalized long term care facilities in France, Germany, UK, Spain and other countries where this is a developed segment.

Medicalized long term care is the bigger segment in Europe than acute care hospital beds. This particular platform is based on our highly successful AvantGuard 800 hospital bed and was the product which allowed us to win the sole source French UGAP tender. Treatments just began during the quarter and are expected to accelerate strongly throughout the year.

Finally, the Hill-Rom 100 low bed, which we announced last week, has the potential to be a game changer in the postacute environment, both in the US and in selected markets around the world. Its entirely new design brings together function and style in an affordable model that offers some of the key attributes of Hill-Rom's market leading hospital beds.

The 100 low bed is designed for a variety of settings including home care, nursing homes, medicalized long term care in Europe and other assisted living settings.

Now extended care institutions and families can offer patients with Alzheimer's or other chronic conditions easier, more comfortable and safer care.

The second set of initiatives I would like to highlight deal with global sales and service channel enhancements. During the quarter we completed training of the 30 new US Acute Care market specialists we hired in the last half of calendar 2007 to allow us to better focus on our large installed base. We also recently completed training of the 34 new medical equipment management representatives who will play a key role in turning around our movable medical equipment rental business.

Both sales forces are beginning to demonstrate their ability to grow our sales opportunity pipeline materially. Internationally, additions have been made throughout our European, Middle East and Africa regions.

As seen on the slide, our North American Acute Care sales footprint has grown nearly 35%, while our EMEA sales presence is up about 7%. We believe we have the largest and most professional sales and service organization both in North America and Europe in our primary severed markets.

Turning lastly towards our strategies to improve gross margins to enhance supply chain efficiencies. We continue to make strong operational progress, although we saw a Hill-Rom quarter one margins decline by about 80 basis points year-over-year. Greg will explain this further.

Let me confirm that our key low cost region manufacturing initiatives are proceeding well and we may commit to meaningful gross margin improvement in line with our prior statements.

Our Monterey, Mexico plant is now staffed by a great team and is coming on line at or ahead of our anticipated plans. By the end of the second quarter we will produce all of our stretchers and all of our care assists beds in a fully self-sufficient facility. We are in the process of localizing significant portions of our supply base which when concluded late in the year will start to deliver additional operational savings.

Also during the quarter we recognized special charges of $2.3 million as voluntary termination packages were offered to select Batesville-based Hill-Rom manufacturing associates in order to improve the cost efficiency of our largest plant.

Going forward our guidance reflects a return to positive gross margin trends during 2008 as we improve our sales mix with more ICU and connected hospital bed and advanced surface sales and ramp up production in Monterey.

In conclusion, we are more confident than ever that our strategies are sound and our fix and grow initiatives are prudent. These investments will continue to provide us headwind on a comparable basis with the prior and the first half of fiscal year 2008. They are consistent with the strategy we communicated previously.

We believe they are essential to reverse the historical under investment and position the company for accelerated growth at or above industry rates.

With that, I'd like to turn it over to my colleague Ken Camp. Ken?

Ken Camp

Thanks Peter. Hello everyone and thank you for participating in our earnings call this afternoon. During my remarks today I will share with you our first quarter 2008 results, outline the challenges we're facing in the funeral service industry and provide details surrounding the initiatives we have in place to address these challenges and to improve our performance moving forward, and also address our outlook for the remainder of 2008. And at the end of the presentation, I'll be available to respond to your questions.

As Peter mentioned earlier, our first quarter revenue was nearly $163 million which represented a slight increase versus the first quarter of 2007. Although our gross margin of 41.1% improved 130 basis points from last quarter, this was 130 basis points lower than the first quarter of 2007.

Due to the fixed cost base of our manufacturing and distribution system, volume is a key driver to both revenue and gross margin for us. The key factors impacting our volume this quarter include relatively flat death rates as well as the slow but steady rise in cremations, yielding fewer burials as noted by some other public companies.

In addition thus far in 2008 the industry is experiencing lower incidences of severe influenza compared to expected levels. And other challenge to both our revenues and gross margin is the continuing industrywide decline and the mix of product sold.

The positive impacts on revenue for the quarter included increased traction from our sales initiatives around merchandising as well as favorable price realization.

Our margins also were challenged by increased distribution cost resulting from compensation and benefits inflation and commodity inflation particularly related to fuel and also a non-recurring gain related to building sales in the prior year.

In accessing our business after completing the first quarter, we sized accelerated customer volume in the fourth quarter of last year in response to our anticipated price increase and sales activities. This effect negatively impacted our first quarter '08 sales.

In addition our first quarter volume was affected by a lower than anticipated influenza rate as I mentioned a moment ago. As a result, we are lowering our revenue guidance range for fiscal '08 by just over 1% on the high end of our estimate and reducing our low end by a similar percentage plus that the low end revenue guidance is in line with last year's results.

Our earnings range will be adjusted accordingly and Greg Miller will address this in more detail later in the call.

We are not pleased with reducing our guidance; we believe it is the prudent thing for us to do given the current conditions. These current conditions in the funeral service industry are challenging and we've seen increased pricing pressure in the marketplace. Our strategic response to these industry trends, however, has been to remain focused on promoting the value of the Batesville brand, our superior product quality, innovative marketing programs and providing our customers with the right casket at the right time.

In an industry where the capacity to make caskets is twice the current demand and everyone in the industry experiences pressures I've previously described, many choose to or are forced to compete primarily on price.

Batesville strategy has been and is to compete on the value that we provide to our customers and their client families. And the initiatives that we have in place are oriented toward improving value and further differentiating us from those who compete primarily on price.

One of the most important things for us is to maintain and increase our revenue. There are three major initiatives we employ in this regard; merchandising, increasing sales to regional consolidators and greater sales coverage particularly among independent accounts.

In an environment where there are fewer burials, there is great power in optimizing each existing service. We help our customers do this by applying proven principals of merchandising in a rather unique way. The Batesville merchandising system is consumer friendly way of providing information. For those who make funeral decisions are aware of the range of choice available to them.

By fully implementing this system our customers experience increased revenue and margin for funerals as do we. The number of customers using this system has grown steadily over the last several quarters and we are pleased with the result at those locations where it is fully implemented. However, it is taking us longer than anticipated to complete the sales, training and implementation cycle.

The good news is once implemented the results per firm are better than we anticipated.

Another opportunity for growth is leveraging the current trend in regional consolidation of funeral homes. In 2007 we organized the subset of our sales team to concentrate on those funeral operators who are growing through selective acquisition. These firms frequently value Batesville's merchandising and training capabilities, our product breadth and quality and our information systems. All of which helped them run their businesses more effectively. We had some encouraging gains among this group in the first quarter and we are optimistic about our strengthening relationships.

The third element for revenue growth which we are pursuing actually stems from the previous two. Because of our reorganized regional consolidator teams and the length of the selling cycle in merchandising, we are adding additional sales reps in selected locales to ensure that all of our customers received effective sales coverage.

In a business like ours which has the substantial fixed base in manufacturing and distribution improvements in volume generally yield improvements in gross margin.

Additionally we use or establish continuous improvement skills to eliminate waste and reduce cost. We have to recognize in the company that uses millions of gallons of diesel fuel each year, fluctuations in worldwide petroleum prices will do some fluctuations in our gross margin percentage.

That said we are confident that our ability to generate stable and attractive gross margins is undiminished.

Finally I'd like to comment on the actions we are taking to prepare ourselves to operate as a new publicly-traded company. Over the past several months we've been further developing our talented and experienced leadership team.

In January we announced that Cynthia Lucchese has joined us as Senior Vice President and CFO for the newly formed Hillenbrand Inc. She brings executive and financial management experience with leading public companies, as well as previous direct financial experience with the separation, similar to our current spend of Hillenbrand Industries and Hill-Rom.

Cynthia will play a critical role in establishing our public company reporting capabilities and in the development and implementation of our future growth strategies.

We've also appointed John Zerkle as Senior Vice President and General Counsel for our new company. John has been with Batesville Casket since 2004 and has over 20 years of private practice experience specializing in corporate finance and general securities law.

In next month we will announce the members of our newly formed Board of Directors. I think he'll be as impressed as I am with these additions that complement our existing board leadership.

In close, I'd like to add that we remain confident that our historic company fundamentals are intact, including our product and brand leadership and a record of stable revenue and cash flow generation.

Thank you for your interest today. I look forward to meeting many of you at on our road show in the future investor meeting.

Now I would like to turn the call over to Greg Miller for his financial update.

Greg Miller

Thank you, Ken. To begin with, I would like to expand on Peter's comment on our year-over-year lower earnings in the first quarter of 2008. As we ramp up our investments spending which began in earnest in the last half of 2007 and we experienced the delay it takes to benefit from some of the investments. Lower earnings on a year-over-year basis have resulted and are expected to continue for the second quarter of 2008.

As our results and guidance suggest we expect accelerated revenue and other benefits from this higher level of spending during the last four quarters to revise higher year-over-year fiscal 2008 earnings in the last half of the year.

Now I will review our results for the quarter. As Ken has discussed, the Batesville Casket results, I will focus my comments mostly on Hill-Rom.

Our consolidated Hill-Rom brand revenues for the quarter increased 4.4% over the first quarter of fiscal 2007. Hill-Rom accounted for most of this increase with growth of 6.4%. Batesville Casket revenues increased slightly with growth of 0.4%.

Hill-Rom's capital sales in the first quarter increased 8.9%. Without foreign exchange benefits, growth would have been 6.2%. Capital sales in North America Acute Care increased 4.9% despite a year-over-year decline of sales within the critical care ICU category.

Excluding this category, North America Acute capital sales would have increased 10.9% in the first quarter versus prior year.

Our 2007 product launches are fueling this accelerated growth. This includes double-digit sales growth of the CareAssist ES, med-surg bed, Affinity IV birthing bed and improved sales of patient environment product lines which consist of architectural products and furniture.

Firstly offsetting the volumes strength in this product line, we continue to experience lower volumes in our high acuity bed platforms. However, we expect to gain some momentum with an upcoming release of our new TotalCare connect product. In fact, we had orders in the first quarter that were delayed which would have propelled our North America Acute Care capital sales growth well into the double digits.

Combined with the new surfaces that Peter discussed and our patient safety solution services, we expect critical care ICU sales to once again grow in the latter half of 2008. On the strength of our new product development investments, yielding significant increases in new product launches and new sales channel resources, we expect North America Acute to continue to improve year-over-year sales growth to the rest of the year.

Capital sales in our international and surgical business increased $9.2 million or 15.3% overall. On a constant currency basis, this represents growth of 7%. We continue to see favorable response to our AvantGuard 800 bed frame and the European low-to-mid acuity bed frame segment, as well as market strengths in other key international regions.

Also during the first quarter, we saw limited shipments of newly developed beds and furniture to the medicalized long term care marketplace in Europe. The impact of this activity on revenues should provide another strong boost to our international business for the rest of fiscal 2008.

Our postacute capital sales posted a relatively sizable increase as a result of enhanced sales channel focus and improved bed frame sales. The recent introduction of the Hill-Rom 100 low bed will assist in accelerating revenue growth in this critical and expanding marketplace.

Moving to health care rental revenues. First quarter rental revenues increased 1.5%. Following a consistent decline during fiscal 2007, our North America Acute rental revenues declined only slightly versus the first quarter of last year. This outcome is due to two very different sets of results. First of all, we were very pleased that therapy rentals increased 7.6% year-over-year as we have benefited from the new leadership team taking strong hold of this business, increased fleet utilization and significant growth in areas we have invested in the past year including new products for bariatric and wound care rentals.

Rental fleet investments, continued new innovative products, and our renewed success in gaining GPO contract support give us reasons for increased optimism in this part of our business. On the other hand, we haven't been as pleased with the results of our movable medical equipment line. We experienced a double-digit decline in the first quarter due to the carryover impact of GPO contract loses in the prior year and other factors.

We have now hired and recently completed the training of 34 dedicated sales representatives. This increase in sales focus, coupled with our continued investment into new equipments specific to this business, should position us to profitably grow our movable medical equipment product line.

North America Post-Acute rental revenues declined 0.8% as softness within our standard extended care rental lines offset continued strong revenue growth within our Respiratory Care product rentals. Despite being slightly down this quarter, we are optimistic as we are introducing a number of new rental frames and surfaces to our rental fleet during the balance of the year, which should help drive growth. International rental revenues increased 25% or $2.8 million which included $1.4 million of foreign exchange benefit and improvements in volumes from much of Europe.

Touching briefly on Batesville Casket revenues of $162.9 million improved slightly as Peter and Ken have already discussed. While each of our four segments provided some level of revenue growth for the prior year, we expect to benefit from a continued acceleration of revenues throughout the remainder of the year, due to the various initiatives already discussed.

Now, I'll dive deeper into gross profit and margin. During the first quarter consolidated gross profit was up on a year-over-year basis by $4.7 million as Hill-Rom's gross profit increased $6.6 million, which was partially offset with a decline in Batesville Casket's gross margin of $1.9 million. While gross margins as measured as a percent of revenue was down 90 basis points compared to prior year, it did show improvement over the third quarter and fourth quarters of fiscal 2007.

More specifically healthcare capital sales gross profit increased 5.2% due to primarily by higher volumes, along with improved price realization. First quarter gross margin percent declined a 140 basis points a year-over-year, primarily due to product mix shift, international mix shift, that is higher sales in our international segment, start up costs to Monterey, and finally higher fuel costs were also contributing to higher distribution and material costs.

On the rental side of our healthcare business, gross profit increased 3.5%. First quarter gross margin improved a 100 basis points year-over-year to 52.7%. This improvement results from increased volume combined with the overall lower fuel service cost obtained from profitability improvement activity during the past year. As discussed previously, we feel that we've established some positive momentum in our rental business, and expect continued improvement in our rental gross profit during the latter part of the year.

As Ken has discussed within Funeral services, gross profit declined 2.8% and a 130 points as a percent of sales, primarily driven by higher distribution cost and a prior year gain on the sale facility that did not repeat in the current year.

Overall, although we have continued to face margin pressures across all our businesses, we continue to believe there are numerous opportunities to improve margins. Progress in our key strategic initiatives has begun to show signs of improvement and we expect these initiatives to have market impact during the latter part of fiscal 2008 and continue into 2009 and '10.

Now let's move to operating expenses. As mentioned earlier, the increased level of investments spending associated with our strategic initiatives continues to result in higher consolidated operating expenses on a year-over-year basis. For the quarter, operating expenses increased 13.8%. The increase was driven by Hill-Rom as Batesville Casket operating expenses were effectively flat year-over-year. Driving the Hill-Rom increase was an increased level of spending in research and development and sales and marketing.

R&D spending was up more than $5 million or 55% over the first quarter of last year. We expect to continue to grow R&D as a percent of revenues until we reach a sustaining range of 5% to 6%. As previously highlighted, we are starting to see the benefits of this increase spending through the launch of more new products across all of our businesses.

Sales and marketing expenses also increased 10% and the increased number of new product introductions and the enhancements to our sales channel. Also included in operating expenses during quarter were $2.3 million in costs associated to the separation of our companies. We also recorded a special charge of $2.3 million during the quarter, related to voluntary termination packages offered to members of Hill-Rom's Indiana manufacturing support organization which were offered as a result of the continued ramp up of production activities in our Monterey, Mexico plant. Ultimately driven primarily by the increase in operating expenses during the quarter, consolidated operating profit decreased $16.2 million or 20.5%.

Adjusted earnings per share was $0.70 compared to $0.81 per fully diluted share in the first quarter of fiscal 2007. A reconciliation of GAAP EPS is provided in the earnings release issued earlier today.

Looking at other financial measures, we continue to be in very solid liquidity and balance sheet positions. Our cash and short-term investments balances increased by more $95 million during the quarter to $289.8 million. Despite the decrease in net income, we improved cash flows from operations to $120 million, an increased of more than [80%] versus the prior year. This resulted from continued collections -- from improved collections of Hill-Rom's past due accounts receivables, which has been an area of focused improvement over the past period. Reflecting strong cash collections, Hill-Rom's DSO was reduced by more than 12% compared to the prior period year.

We believe we will continue to see DSO improvement throughout the year. On another note, we adopted FIN 48, Accounting for Uncertainty in Income Taxes. The adoption of FIN 48 resulted in a decrease to beginning retained earnings at October 1, 2007 of $10.3 million. Please refer to our SEC Form 10-Q which will be filed later this week for additional information related to FIN 48.

Now, moving to 2008 guidance update. Hill-Rom's previous guidance for revenue of $1.427 million to $1.476 million, which reflects a 5% to 9% growth over prior year and our adjusted guidance for income before taxes remained unchanged. As Ken mentioned, Batesville Casket revised guidance reflects a revenue reduction of $89 million from previous guidance to $668 million to $686 million. Accordingly we revised adjusted income before taxes as well. The impact of this change on adjusted earnings per share is approximately $0.05. Offsetting this decline on an unadjusted GAAP basis, Batesville Casket has also reduced their estimated anti-trust litigation cost from $20 million to $12.5 million.

Finally, the Hillenbrand consolidated effective tax rate is now expected to increase to 36.5% from our original estimate of 35.5%. The fiscal 2008 effective tax rate has been unfavorably impacted primarily by an increase in the estimated state and local tax expense due impart to the adoption of FIN 48, as well as reduced benefits from federal tax credit.

A lower federal tax credits relate primarily to the expiring, research and development credit. While it is possible if not likely that this credit will be extended later this year, no benefit can be taken for periods when the credits has expired, until such time has any extension is enacted. The impact of this change of the effective tax rate on adjusted earnings per share was approximately $0.05, and as such Hillenbrand industry's consolidated revenue guidance for fiscal 2008 is now $2.95 billion to $2.162 billion, GAAP earnings per share increases $0.01 to $3 to $3.28, while adjusted earnings per share decreases $0.10 to $3.10 to $3.38.

In conclusion, we continue to make strong progress towards achievement of our strategic goals. We remain confident that we are on the right track and we expect to continue to see increased returns from our strategic investments during the balance of the year.

With that I'll turn the call back to Peter. Peter?

Peter Soderberg

Thank you, Greg. And ramping up our prepared remarks, I would like to briefly update you on the status of our planned separation. As Andy said, just three weeks ago we filed a Form 10 amendment with the SEC on behalf of Batesville and SpinCo. There will probably be one or two additional amendments to be filed if we get closer to separation. But that process it seems to be advancing nicely. We also expect to make an 8-K filing shortly that will contain three year trailing financials for the remaining company which is today's Hillenbrand Incorporate and Hill-Rom business.

We have updated and confirmed our plans to affect the separation at the end of the quarter, assuming we can progress our approval process with the SEC on a timely basis. This coincides with the end of our second fiscal quarter and provides us time to prepare adequately for the separation.

As stated in the Form 10, we plan to change the names of the resulting separated entities to Hill-Rom Holdings and Hillenbrand Inc. This will be done in order to align the well respected Hillenbrand name with the surviving Batesville Casket operating company. This name change requires the shareholders vote. We will commence proxy mailing next week for the meeting to be held on March 13. Shareholder vote to affect this thin separation is not required.

We expect one issue trading to come sometime in mid March just prior to the separation. Coincident with this timing and tentatively during the weeks of March 17 and 24, Canada's Batesville team and I and my Hill-Rom team will commence non-deal investor meetings to further describe the exciting future for each of our newly independent companies. We look forward to meeting with as many of you as possible during this time.

Before we take your questions, I would like to summarize by observing that we remain committed to the strategies we laid out for you just over year ago in New York. While we have much to accomplish, we are pleased with merging signs of progress in areas where we have invested, but we are not yet satisfied. Our revised guidance reflects our continued confidence in Hill-Rom's ability to achieve this original plan and the guidance we have provided for 2008. And our guidance also reflects the small downward revision in Batesville Casket sales and EPS as Ken and Greg discussed.

Finally the separation is proceeding nicely, and we continue to believe that it will be a transformational event, that will unlock value creation for shareholders and employees of both operating companies. We will now be pleased to take your questions.

Andy Reith

Okay Jamie, go ahead and give the instructions please.

Question-and-Answer Session


(Operator Instructions). We will take our first question from [Steven Nisan with Mindflow Capital Investments].

Steven Nisan - Mindflow Capital Investment

Hi, thank you very much, Peter first of all good job, thanks for always being so often with our shareholders on the call.

Peter Soderberg

Thank you, Steven.

Steven Nisan - Mindflow Capital Investment

Couple of things, regarding operational improved initiatives: what are you going to be doing this year? And: what have you been doing so far revolving around lean manufacturing, TQM, Six Sigma to improve throughput in your plant? And: what benefits do you guys expect to see?

Peter Soderberg

Let's break this down by the two operating companies, and I'll comment on Hill-Rom and I'll let Ken comment on Batesville.

Steven Nisan - Mindflow Capital Investment


Peter Soderberg

And I will expand your question really to include all of the operations surrounding our, kind of, order to cash as well. In fact maybe I'll start there. If you look at the improvement in our rental business, the improvement in days of sales outstanding, that is a no small part due to both systems improvement and process improvements. We’ve had multiple an extensive lean initiatives in our very extensive order processing and cash collections operations that have yielded, frankly, very surprising and delighting benefits.

On the supply chain side, we have as we mentioned in the call done a leaning exercise in the big Hill-Rom plant here in Batesville and I'm pleased to say we haven't missed a beat. That team has done a great job. If I look globally, we are getting more than inflation out of our cost and we continue to accelerate that mandate. Customers are giving us price unfortunately, so we have to take it out of cost really rapidly. And so I would say that lean has taken flower and has even more room to grow and prosper. Ken.

Ken Camp

Well BCC has been students and practitioners in increasing degrees of the Toyota Production System, Kaiser has had done continuous improvement since the mid 90s and as characterized by a lot of our people having training in Japan including more than half the senior officer teams. So we consider a way a life, we also consider a journey, and while we are pleased with our abilities there and we occasionally think we've done it all, every year we find ways to eliminate more opportunity.

I'd echo Peter's thoughts that, while these kinds of activities usually started manufacturing there was very, very high leverage of administrative processes to improve speed, improve quality and eliminate waste. So I think in our future calls, our future strategy development you will see that as one of the bed rock elements of the new Hillenbrand Inc. going forward.

Steven Nisan - Mindflow Capital Investment

In the manufacturing facilities: how are you guys measuring yourselves? Are you looking at well enough return on net assets? Are you looking at OE overall and could be effecting us. How are you guys measuring yourself to make sure you are hitting certain metrics at our demand and of your shareholder and of your Board?

Peter Soderberg

Well I'd say we do a lot of the traditional things. We look at conversion efficiencies and what we look for is material progress, net of inflation, so that's kind of the direct labor. As you can appreciate, and particularly in the [Medtech] business, materials and components are a very significant cost and, therefore, we obviously look at our materials cost to sales. We look at our return on asset employed and we “incentivize” our teams on ROE. We have major initiative on inventory reduction and receivables reduction as we've previously alluded to. In fact I think you look at our free cash flow performance, I would hope you are delightfully surprised.

Steven Nisan - Mindflow Capital Investment

Extremely. Very nice: so are you guys regarding some of your manufacturing facilities do you have any concerns on throughput? Or: all your plans kind of running at the level that you like them in the other certain areas of the world that you would like to improve on throughput?

Peter Soderberg

Well I will start by saying that our plant in France is inundated with business, and we are running at the absolute maximum. And yes we are concerned, but we have made a strategic investment in manufacturing capability there to build our products in a different way, with state-of-the-art technology. I am sure we are going to use -- we will see a very attractive return on that investment.

Steven Nisan - Mindflow Capital Investment


Peter Soderberg

In the other plants we are bring on Monterey, Monterey is a pretty darn big plant, and that as we have said previously is been built to allow us to enter new markets and give us the cost position, that allows a value price point in particularly internationally and in Post-Acute Care. So that is a new capacity coming online. Ken I'll let you to talk about Batesville.

Ken Camp

Without going through to all this things that we do, I would -- if you let me post little bit in last four years

Steven Nisan - Mindflow Capital Investment

I'll let you boast.

Ken Camp

Thank you, sir. In last four years, three of our five manufacturing plants have been selected by IndustryWeek Magazine as among the top 10 plants in North America. One was selected, by the Association for Manufacturing Excellences, as the number one plant in North America all industries. I was a little shocked when a fellow that ran a submarine factory asked, if he could come - not the submarine sandwich, an actual submarine factory. Could he come and learn from us.

I thought that was an amazing thing. But most important the measures that we use in the plants are design to do several things: one is, generating high first call yield and great quality; Second, to have one-piece flow and mix model, so that we don't batch anything. And the incentives that they have and the goals that they have roll up to important measures for us, which are continued improvements in capital employed, in inventory and inventory turns, and also in comp and benefits as a percentage of net sales are big measures for us. Ultimately what we really care about is the return we get for shareholders on the assets employed and our ability also, as Peter mentioned, to generate free cash flow.

Steven Nisan - Mindflow Capital Investment

Okay, if you are going to look at couple of years out: where would you like your plants to be running at a certain level of efficiency? If you guys start today and say we are going to put these systems and solutions in place to accelerate our continuous improvement initiatives to get X results two years from now: what would you like to do? And: where would you like to be, if you could be in a perfect world?

Ken Camp

Well, as I said - this is Ken. As I said in my presentation, volume does lots of things, so first: I want more sales volume, and second: continue to improve the efficiency of playing on their major measures. We have a number of industries that we care about and we really like on average, we like at least the 10% improvement in the major plant measuring sticks every year.

Steven Nisan - Mindflow Capital Investment

Okay. So 10% annualize is a kind of target you will likely to get?

Ken Camp

Yeah, they are measuring sticks, that doesn't really necessary, that doesn't go up specifically?

Steven Nisan - Mindflow Capital Investment


Ken Camp

Steven I'll bring it back to our New York presentation. We are focused on gross margin improvement and we have described a journey that will take four to five years and we are looking for 400 to 500 basis points and that will come in the small part from two places from our supply chain efficiencies and from our R&D ability to better platform.

So that's really got, I don't look at it as to what percent capacities the plants run. I look at what are we doing to gross margin which is a measure of our engineering and our supply chain efficiencies as well as our innovation process.

Steven Nisan - Mindflow Capital Investment

Okay. Thank you very much.

Andy Reith

Next question please.


We will take our next question from Andy Keller with Merrill Lynch.

Andy Reith

Go ahead Andy.


Mr. Keller's phone line has disconnected. We will go next to Peter Bye with Jefferies & Company.

Peter Bye - Jefferies & Company

Thanks and congratulations guys. Obviously, you can see a lot of progress from our side and going on track to where you are going four to five years from now. Maybe just for Ken first, I don't really have the historical data, but: what's the sensitivity here to economic cycles on product mix shifts for that business? If you look back historically through economic cycles: Is there really any at all?

Ken Camp

Historically, the effect of things that occur in the economy such as the potential recession do not have a significant effect on the decisions of people make at the time of funerals. Some of that because they prearranged and prefunded that funeral, others are because significant event like that is apparently viewed differently than discretionary purchase. They do, however, have some affects on commodity costs as I have mentioned before.

Peter Bye - Jefferies & Company

And just on that: what's the $0.25 to $0.50 kind of move or picture number and gas prices? What kind of impact does that have on your gross margins?

Ken Camp

I don't know if that break it down that far, but I can tell you we use several million gallons a year and it certainly does affect that substantially. Although we have gone through cycles before and I am sure we will go through them again.

Peter Bye - Jefferies & Company

Okay. What if you use commodity basket index at 2% to 3% move? What does that do for your gross margins?

Ken Camp

You will have to calculate that, I really couldn't do that as we sit here and I am not sure I want to dive down into that.

Peter Bye - Jefferies & Company


Ken Camp

That is considered in our guidance though.

Peter Bye - Jefferies & Company

Yeah. And Peter just on the sales force productivities, well I mean you done a great job on the manufacturing question as well. You had big expansion on the sales force front. When do you thing you are going get, I guess, more improvements on the hires? So: what is the natural lag time for your business?

Peter Soderberg

Great question! You know what's happened is, as we have started to get the product development pipeline on hinged, we have started to kind of overwhelm our sales force, particularly our clinical sales force with priorities. So what we decided to do was free up our US acute care clinical sales force by taking the moveable medical equipment off their solders.

Frankly a little bit difficult point, we had it to do over when we did the Mediq acquisition, we might not have limited the sales force and merged it but in fact we did and now we are creating a focused sales force for the MME business. It's freed up the clinical directors to take those great two new products I talked about, the TotalCare Bariatric bed and the E700 surface and I think you are seeing early signs or that kind of the positive mix. You are seeing signs of real growth in therapeutic surfaces. What you are not seeing is probably the impact of the new people get on sales.

What I would traditionally expect is that there will be six to nine months before you start to move the needle. But the good news is they are all out, they are all trained and we track everyday the core activity opportunity pipelines, we're seeing movement there and god willing the rest will follow.

Peter Bye - Jefferies & Company

All right, thanks. Just one more if you don't mind just on KCI deal. What is that bring you that you don't want to have already in-house? And you've been stepping up R&D yourself internally. Could you just maybe give any little bit more on it?

Peter Soderberg

Well, let's get who did what to whom right. What we did was, we licensed our IT to enable KCI to build replacement surfaces or step deck that are market leaders in med-surg which is VersaCare and the ICU. They are the third licensee of this portfolio and we're driving royalty income from the other two.

And our position is that we seek to serve our customer and, however, they want to be served and we find sometimes they would prefer to use somebody else's surfaces. So rather than fight that trend, we have taken the approach that will give other people access under license and we on our part will innovate like crazy and hopefully we'll get more than our fair share of the business.

Peter Bye - Jefferies & Company

All right, great! The next time I'll read it little more carefully then. Thanks again.

Andy Reith

Next question please.


Thank you, sir. (Operator Instructions). And we'll go next to Greg Halter with Great Lakes Review.

Greg Halter - Great Lakes Review

Good afternoon.

Andy Reith

Hi Greg.

Greg Halter - Great Lakes Review

Hello. We have another company that we cover that has put up a plant in Monterey, Mexico and they have been there, I don't know two years maybe. And there I have seen some very nice improvement as well. Although recently they have indicated some problems with labor as well as movement of equipment down from the US and need to outsource and so forth. And just wanted to pick your brain in that regard to see: where you stand relative to labor and any labor force issue there maybe? And: possibly any outsourcing that you may need to do?

Peter Soderberg

Well, Greg, nice to have you on the call and thank you for your continued support. I know the company very well, I know the situation very well and I say we are a bit different. I would characterize that situation as a I believe it's a transfer of equipment in our case.

We are predominantly taking an existing building and we are equipping it with new manufacturing equipment steady our paint line, building equipments. So we have brought this thing on line at a speed we see before. We just brought that building and closed down it I think in late February a year ago, less than 12 months ago. And it needed a lot of repair but we got that done and we are now one month away of having really all of our subsystems in place to manufacture the two major product lines I talked about. So, I would give the team very high marks, it's a high performing team, I am just so trilled with all are associates to Monterey.

We all have problems with turnover down there and the turnover can be up to double digits a month. And all of us who do business in Mexico have an obligation to do very effective training and put in the place the kind of the employee retention tools that seek to minimize that turnover. And the really good companies get that number down to a very manageable level and that's where we intend to be.

Greg Halter - Great Lakes Review

Okay, great. I appreciate that. And Ken, you had talked about on your prepared remarks increased pricing pressure in the area. Can you comment where that is coming from? Is it on the other manufacture side? Or: from the funeral homes? Or: funeral directors? Or: where exactly?

Ken Camp

Well, I would say that, like great many industries, every morning you get up in the tug of “commoditizations” pulling your one direction and you try to pull the other. And what I was referring to there was, a number of our competitors who have excess capacity either are forced to or choose to. I am not sure which lead with price. They lead their sales call with price. And most of our energy goes into leading with value. And those customers that respond to that generally are on roster and those who are very price oriented are someone else's. What we do everyday is try to show people that as a funeral director, quite candidly you make a lot more money by selling caskets than you do by the way that you buy them.

Greg Halter - Great Lakes Review

Okay. In the press release, there was a sentence that I'd just like to get also better clarification. As towards the end in assessing our business after completing the first quarter we noted accelerated customer buy-in in the fourth quarter in response to our anticipated price increase in sales activities. What, if you can parse that out a little bit, or: what exactly does that mean?

Ken Camp

Well, as our fiscal year ends we have a couple of pressures. One is the major trade gathering in the profession, the National Funeral Directors Association convention occurs just around the time of our fiscal year ending, in this case a couple of weeks after, it's usually early October we end in September.

And it's been a long standing practice for many suppliers to have a deal for funeral directors when they come there. So lots of time what we want to do is kind of respond to that a little bit early, that's one factor.

Another one is when we announced the price increase, it's not all unusual for someone to buy ahead of that price increase and we saw that pretty substantially this year and the third element of course is that year end our sales representatives have their own individual goals there, people that are compensated by a commission and bonuses and they will strive to head a new level. This year those three things came up to a higher level than they had in past.

Greg Halter - Great Lakes Review


Ken Camp

In reorder business when that happens in one month, you kind of pay it back the next month.

Greg Halter - Great Lakes Review

Okay. And one last one if I could: what are your capital spending and depreciation, amortization expectations for both of the individual businesses and , I guess, on an individual basis for Hill-Rom and Batesville?

Ken Camp

Yeah, those have not changed from our original guidance which had Hill-Rom at $115 million for capital expenditures and about $109 million for depreciation and amortization and had casket at about $20 million for CapEx and about $19 million for depreciation and amortization, that totals for Hillenbrand $135 million and $128 million respectively.

Greg Halter - Great Lakes Review

Okay, great. Thank you.


And at this time, there appear to be no further questions.

Andy Rieth

Okay. I think we'll ramp up if there are no further questions. I thank everybody for their interest and attention, and we look forward to meeting with as many of you as possible as we approach our spin date. Thank you very much and good evening.


And that does conclude today's conference. We do thank you for participation. You may disconnect at this time.

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