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Hillenbrand (NYSE:HI)

Q3 2012 Earnings Call

August 02, 2012 8:00 am ET

Executives

Chris Gordon

Kenneth A. Camp - Chief Executive Officer, President, Director, Chairman of K-Tron International and Chief Executive Officer of K-Tron International

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

Joe A. Raver - Senior Vice President and President of Process Equipment Group

Kimberly K. Dennis - President

Analysts

Daniel Moore - CJS Securities, Inc.

Clint D. Fendley - Davenport & Company, LLC, Research Division

Stephen A. O'Neil - Hilliard Lyons, Research Division

James Clement - Sidoti & Company, LLC

Operator

Good morning, everyone, and welcome to Hillenbrand's Earnings Call for the Third Fiscal Quarter 2012. A replay of the call will be available until midnight Eastern Time, Thursday, August 16, 2012, by dialing 1 (855) 859-2056 toll-free in the United States and Canada or 1 (404) 537-3406 internationally and using the conference ID number 43750340. This webcast will be archived on the company's website at www.hillenbrand.com through August 2, 2013. If you ask a question today, it will be included in any future use of this recording. Also note that any recording, transcript or other transmission of the text or audio is not permitted without Hillenbrand's written consent.

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

Chris Gordon

Thank you, Allie, and good morning. Welcome to our earnings call for the third quarter of fiscal 2012, which ended on June 30. With me on today's call are Hillenbrand President and Chief Executive Officer, Ken Camp; and Chief Financial Officer, Cindy Lucchese. During the course of today's conference call and the question-and-answer session that follows, we may make projections or other forward-looking statements that are subject to the Safe Harbor Provisions of the Securities Laws regarding future events or the financial performance of the company. We caution you that these statements are only our view of the future and that actual results may differ materially. We also alert you to the risks described in the documents we file with the Securities and Exchange Commission, such as our annual and quarterly reports on Forms 10-K and 10-Q. We do not undertake any obligations to update or correct any forward-looking statements.

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

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

Kenneth A. Camp

Thanks, Chris, and good morning, everyone. Thank you for joining us today. After the market closed yesterday, we released our earnings and filed the 10-Q and both documents are available for our peer review on our website. As you saw, we were able to achieve double-digit revenue growth over the third quarter last year and delivered $0.37 per share in adjusted earnings. Once again, our results were strengthened significantly as a result of our acquisition strategy and the growth of those acquisitions as we continue to diverse our holdings into various growth industries.

The Process Equipment Group continues its strong performance, contributing nearly 70% -- well, I'm sorry, 40% of total enterprise revenue and over 1/3 of our total EBITDA. This has led to consolidated revenue growth of 13% to $238 million for the quarter. Our diversification strategy continues to expand geographic reach with 17% of our revenue now coming from outside the United States. As most of you know, we manage the business for predictable and sustainable cash flow. And despite the headwinds in burials the funeral products industry is experiencing, consolidated cash flow from operations remains strong at $50 million for the quarter, an increase of 17% over the prior year when we exclude the one-time effect last year of the Forethought Note repayment. As you can see, we continue to achieve positive results from the execution of our strategy, even in the midst of a volatile global economy.

I'll begin with a couple thoughts on the performance of the platforms and start with an overview of the Process Equipment Group. This platform has grown revenue 53% over the prior year to $93 million and while a significant amount of this increase came from the addition of Rotex, the Process Equipment Group grew approximately 5% organically compared to the prior year. The Process Equipment Group's consolidated order backlog grew 3% sequentially to $140 million during the quarter. This backlog continues to represent approximately 1/3 of the platform's annual revenue and gives us some good visibility through the rest of the fiscal year and somewhat beyond. This visibility is beginning to expose a degree of uncertainty as global markets have demonstrated some softness for a little while now and the U.S. energy sector continues to evolve.

I don't think it will surprise any of you that there is an increased perception of risk in the European markets and the Asian economy, dominated by China, has slowed its growth over the past few quarters. For China, this means their economy grew at an annual rate of 8%, down from a 9% rate last quarter, and they have historically grown at about 10%. Additionally, we've seen some impact related to the U.S. energy market changes.

Due to almost historic lows in natural gas prices and increased regulatory pressure on coal fire and electric generation, there is reduced demand for coal, a condition which affects our mining customers. And as we said before, one of the core elements of Hillenbrand's growth through acquisition strategy is to acquire successful companies with great brands that can benefit from our core competencies of strategy management, lean business and intentional talent development. When we acquired the companies which now form the Process Equipment group, our goal was to accelerate their growth, and a big part of that plan for organic growth in these companies is to expand into new markets with both existing and new products, and we've leveraged our strategy management process to take advantage of some operational synergies between these operating companies.

An example of this is Rotex and TerraSource, and I'll explain that name in a moment, working together to expand their geographic reach by jointly entering Russia to serve a number of key customer segments there. Now let me tell you a little bit about TerraSource, which I just mentioned. As we've discussed in past calls, the Process Equipment Group has been diligently working on their transformation plan to consolidate the operations of what was previously referred to as the Size Reduction Group into a single organization managing our 3 well-known brands. For those who may be new to the call, those brands are Pennsylvania Crusher, Gundlach and Jeffrey Rader and this plan has included a new management structure, realignment of their production facilities and the consolidation of some elements of their previous manufacturing base. An important part of aligning these operations was choosing a name to unite the brands in the eye of our customers. There was also the nagging issue of some Internet searches related to size reduction, leading to certain weight-loss companies and shrink-wrap and other things, and I think a lot of people just didn't have a clear vision of what the Size Reduction Group meant. It probably even confused us a little bit from time to time.

So to complete the process, we've chosen to rename the Size Reduction Group "TerraSource Global" and we'll refer to it as such from this point forward. In TerraSource, we'll continue to market products and product lines under the previously mentioned Penn Crusher, Gundlach and Jeffrey Rader brands. So we continue to execute our strategy in the Process Equipment Group and we're very, very pleased with the results that they're generating.

I'll turn to a few brief comments to the Batesville business platform, which continues to face severe headwinds in regards to burial volumes in the quarter and the year. As you saw in our release last night, the most significant driver affecting Batesville's 3% drop in revenue for the quarter was a 5% drop -- decline in the number of North American burials. You'll remember from our call last quarter that the U.S. and Canada did not experience material levels of influenza and pneumonia this year and total death levels continue to be down compared to the prior year. We also estimate that the cremation rate has increased by about 160 basis points. This is somewhat higher than the long-term trend of 120 basis points that we've observed in past years, but we cannot predict with certainty that the North American death rate will return to normal. Most in the industry and in government believe it can't indefinitely remain this low and it should move toward the historic norm. However, we have no reliable way to predict when or how much those changes might be.

As we discussed in our earnings release and 10-Q filing, net revenue EBITDA and net income are down for the quarter in the Batesville platform, as are margins. While external factors like fewer deaths and an increased cremation rate drive these declines and are outside our control, we've identified a number of opportunities and taken specific actions that will make us more efficient and effective in the future. We're constantly evaluating our performance and right-sizing the organization at all levels to respond appropriately to the changing customer demands and consumer demands in the market, whether they're up or down. Under current conditions in the Batesville business, that means faking some capacity off-line, which we've discussed in previous calls, and any time you relocate production, especially across -- excuse me, multiple plans, sorry, there are costs associated with getting a new line up and running. The Batesville team has experienced some of those unusual situations and they're on top of it and making the necessary adjustments as required.

So as we continue to take decisive actions to ensure that we manage costs while at the same time maintaining our superior customer service and quality, we're seeing a substantial level of discounting from our competitors and we are responding as necessary to meet competition. In short, we're not going to let our business erode nor are we going to give it away. Batesville's management team has taken swift and thoughtful actions that reduce costs and preserve the high-quality standards to which they're committed and that their customers deserve.

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

Cynthia L. Lucchese

Thank you, Ken. At the top line, Hillenbrand's third quarter revenue grew 13% to $238 million. The key driver of this growth continues to be the Process Equipment Group delivering a 53% increase, with total revenue reaching $93 million this quarter.

Now an important metric we track is organic growth, which we define as the year-over-year comparison of revenue on a constant currency basis with all of our acquired companies included in the base year. Well, now, we believe this is important because it shows comparable performance, not only for the core Process Equipment Group but also the year-over-year growth in newly acquired Rotex. As Ken mentioned earlier, organic growth for the Process Equipment Group was 5%.

In addition, for the ninth quarter in a row, and in fact, ever since we purchased K-Tron, the Process Equipment Group's backlog grew, reaching a total of $140 million at the end of the third quarter. Now, this represents a 3% increase over the second quarter. As you may recall, future revenue associated with the Process Equipment Group is strongly influenced by order backlog. On a quarter-by-quarter basis, we expect to see some volatility in this number, particularly when we ship very large orders. However, we're more than pleased to see the continued strong growth in our order backlog. And as we've discussed in many of our past calls, the Process Equipment Group can experience lumpiness from quarter to quarter when sizable jobs are completed and shipped. In 2012, like most years, we have a few unusually large orders and we continue to expect these to positively impact our results in the fourth quarter. So given our visibility in the backlog, we expect the Process Equipment Group to deliver their largest revenue quarter this year in the fourth quarter. So this also means that we expect our backlog to decline sequentially in the fourth quarter.

Batesville's revenues was $146 million or 3% lower than the prior year, largely due to a 5% decline in North American burials. Now given the decline in burials, we experienced aggressive price competition that drove down our average selling price.

Turning to margins, our gross profit margin for the third quarter was 38.1%. On an adjusted basis, it was 38.6% or 220 basis points lower than the prior year. Now as a reminder, the items we adjusted for include restructuring charges at both of our business platforms. Batesville's gross profit margin on an adjusted basis was 35.4%, a 400 basis point decline from the prior year. Lower volume and average selling price, short-term transition costs and increased commodity and distribution costs were the key drivers in the decline. The process equipment group's adjusted gross margin was 43.6%, in line with the prior year.

Now I'd like to provide a few details on our restructuring actions. At Batesville, we continuously size our operation to respond to changing market conditions and consumer preferences. For example, we consolidated our first and second shifts at one of our plants earlier this year and we continue to refine our manufacturing processes to increase efficiency without compromising quality. When we plan these types of operational changes, we also plan for the incremental cost associated with implementing the change in the short term, but ultimately, we expect to realize annual savings of about $5 million that will positively impact gross margin.

During this past quarter, we completed a workforce reduction at Batesville that we expect will generate $4 million in annual savings. $1.4 million of the $2.4 million in total restructuring charges this quarter relate to that change at Batesville, the majority of which is reflected in operating expenses. Now, Batesville has maintained a low operating expense-to-sales ratio, on average ranking from 15% to 16%, and the Batesville management team is working diligently to preserve that desired ratio despite this top line pressure.

We incurred $1 million in restructuring charges this quarter at the Process Equipment Group, and as Ken mentioned earlier, we realigned that organization and consolidated certain manufacturing facilities. The majority of this $1 million charge is reflected in cost of goods sold. These actions underscore our relentless focus on improving operations to lean, whether we're experiencing strong growth, as in the case of the Process Equipment Group, or lower volumes due to market conditions, as we are currently experiencing with Batesville. Lean business is ingrained in the Hillenbrand culture and we'll continue to preserve the strong bottom line results that we demand and that our shareholders have come to expect.

Turning to operating expenses. For the quarter, operating expense as a percentage of sales was 24.2% or 23.6% on an adjusted basis, both consistent with prior year. We saw improvement at the Process Equipment Group, as well as at corporate, with Batesville's adjusted ratio increasing by just about 50 basis points. These ratios include the ongoing amortization expense from the intangible assets of about $1 million per quarter that were established as a result of the Rotex acquisition. Excluding this amortization expense, the operating expense ratio actually improved 20 basis points on an adjusted basis. So this is evidence that our lean strategy is paying dividends in the form of reduced operating expenses.

Other income and expense was about $800,000 unfavorable to the prior year, nearly all of which is related to the full collection of the Forethought Note in April of 2011. As a reminder, our full year results will be negatively impacted by this factor by about $6 million or $0.06 of earnings per share.

As we've discussed in previous calls, some years we experienced gains on our limited partnership investments and some years, we experienced losses. For the quarter, investment gains were $1 million, consistent with the prior year. However, on a year-to-date basis, we have had only $1.5 million of investment gains versus the $5 million we had in 2011. Absent significant gains in the fourth quarter, we would have about $0.04 to $0.05 of unfavorability to earnings per share in 2012 compared to the prior year.

Our adjusted effective tax rate this quarter was 29.2% compared to 31.9% last year. The improvement in our effective tax rate is due primarily to the favorable resolution of uncertain tax positions this quarter. We expect our full year adjusted effective tax rate to be somewhere around 32%, and as we like to say here at Hillenbrand, cash is king and our results in this area again were positive as we continue to deliver strong operating cash flow quarter-after-quarter. Year-to-date, we delivered $110 million of operating cash flow. If you exclude the onetime cash receipt for the collection of the forethought note in 2011, our operating cash flow increased by $14 million or 15% over the prior year.

Net income decreased 5% over the prior year to $21 million, with EPS down 6% to $0.34. On an adjusted basis, net income declined by 3% to $23 million and EPS was down 3% to $0.37, as the strong growth from the Process Equipment Group was more than offset by lower volumes at Batesville. And adjusted EBITDA was $45 million, a 1% decrease compared to the prior year.

So before I cover guidance, I wanted to mention our recently announced 5-year $600 million credit facility, which provides us with additional financial flexibility to support our acquisition strategy, as well as our ongoing operations. Note that interest costs will increase slightly, as the new facility will be about 60 basis points more than our previous facility. And finally, turning to guidance, we are reaffirming our previous guidance for 2012, global constant currency revenue increasing 13% to 15% over 2011 and full year adjusted EPS guidance of $1.68 to $1.76. Now, given current conditions that we see, including declining burials due to low deaths and increasing cremations, as well as global economic uncertainties, we would like to caution investors that these conditions may push us near the lower end of our guidance range.

As a reminder, our adjusted EPS guidance excludes the tax benefit we reported in the first quarter related to our international integration, along with the related long-term incentive compensation, backlog amortization and business acquisition costs, anti-trust litigation expense and sales tax adjustments. On a GAAP basis, our EPS guidance remains unchanged at $1.70 to $1.78.

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

Kenneth A. Camp

Thanks, Cindy. We hope that you can see that Hillenbrand is a thoughtful, prudent company with a long-term view of the future. We're committed to the proven acquisition strategy that is serving us well and which is driving the transformation of the company to reduce our dependence on the number of deaths in the United States and give us exposure to growth markets around the world.

We're continuously exploring 3 levels of acquisitions. The first is tuck-in or adjacent acquisitions that support the growth strategies of one or more of our operating companies, and most likely those would be in the Process Equipment Group. These relatively small acquisitions would allow us to increase our ability to offer system solutions, support geographic expansion or add value to a product line or process. The second level would be to add an operating company to the Process Equipment Group, as we did with Rotex last year. And the third type of acquisition would be to add a company that represents a third business platform, one on which future growth could be based. Please don't assume that mentioning this implies a signal that a platform acquisition is imminent or there isn't, or that an add-on company is imminent or there isn't. We're simply being transparent about all of the elements that could one day be part of our acquisition strategy and thereby be part of a larger and more global Hillenbrand.

Our criteria for acquisitions hasn't changed. We want to continue to build Hillenbrand as a global diversified industrial company with an emphasis on diversification to balance both risk and growth. It's also critical that an acquisition candidate be culturally compatible, successful in its industry, poised for growth and able to leverage our core competencies in strategy, lean business and talent development to accelerate that growth trend. We stated before, the goal is that our strategy will result in revenue growth and profitability. As always, our focus will continue to be on strong cash generation that strengthens our balance sheet, enables us to execute our strategy and allows us to pay an attractive dividend. We're committed to being careful stewards of the company and shareholders' investments in that company, and we want to provide meaningful value to our shareholders despite economic times like these when the global economy is both challenging and increasingly unpredictable.

Now for our Q&A session, we'll be joined by Batesville's President, Kim Dennis; and the Process Equipment Group President, Joe Raver. We're ready to take your questions and Allie, if you'd open the lines, I would appreciate it.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Daniel Moore of CJS Securities.

Daniel Moore - CJS Securities, Inc.

The first one, Ken, you talked about the 3 potential acquisitions. Given the larger new credit facility, should we take that as a signal that you're, if not closer, still actively engaged to looking at a larger third type -- third leg-type acquisition?

Kenneth A. Camp

Well, I think there's 2 parts to that credit facility. One is it was time to renew the other one. When, prior to the spin in '08, we had got the credit facility consistent with that spin, and that was going to expire, Cindy, in 5 to 6 months...

Cynthia L. Lucchese

April of 2013.

Kenneth A. Camp

April of 2013. So we spent a lot of time figuring out what's the best time to renew that, and in terms of timing, the one thing you know for sure is when you go to bankers and you don't have much time left, the rate goes up. So we did a lot of careful analysis there. That had a lot to do with timing. But on the subject of acquisitions, I kind of said it all a couple minutes ago. We are always looking and they come when they come. And mostly, we're looking at strategic acquisitions and that is an opportunistic venture. You have to find the right thing at the right time. As we say here, we -- you got to kiss a lot of frogs before you find a princess, Cindy says prince, and we're kissing a lot of frogs. So we'll let you know as soon as we have something important to say about it.

Daniel Moore - CJS Securities, Inc.

All right, and maybe you'll indulge me. I'll try it a different way. You called out about $200,000 in acquisition-related costs that you backed out in the press release for kind of adjusted EPS. Were those, as you say, across all 3, looking at all 3, or is the -- were those related to a specific acquisition in one of those 3 levels?

Kenneth A. Camp

Yes, I don't want to get into the categories of acquisitions that expenses might go to, but I can tell you that we do -- our process is that we view acquisitions for always more than one category.

Cynthia L. Lucchese

Absolutely. And Daniel, I'll remind you that what happens here with like Rotex and the acquisition there, we'll have some ongoing small amounts of transition costs.

Kenneth A. Camp

It's a mix of those things, but we do have a standard process that we use and we've got a team that is working diligently.

Daniel Moore - CJS Securities, Inc.

Okay. Let me switch gears for one more. As we look out to 2013, you've talked about goal of double-digit top line growth in the Process Equipment business long-term. You mentioned some of the challenges, Ken, in coal energy. Obviously, some difficult comps with regard to frac sand-related revenue that's been generated over the last several quarters. Talk about the sort of double-digit top line type goal for 2013 in the context of some of those challenges.

Kenneth A. Camp

Well, I would say that there's no question that there are challenges with, I think, any company setting goals right now. There's so much uncertainty in the world. Joe's -- I'm going to Joe handle this as well, but he's based in Zürich, as you know, so he's immersed in getting the feel and understanding of what the mood is like in Europe and what he sees. Here in America, we can't even tell people that run escorts can't -- don't have a clue what their tax rate is going to be. In fact, all of us have no clue what our tax is going to be very far into the future. So what we're sensing is a lot of uncertainty and trying to be alert to the fact that, I guess, a stampede could be started at any time. But if politicians kind of pay attention and get it a little bit right, they could, I believe, stop a stampede from starting. So as we think about the energy business, we are in the coal business and also in the gas business. Yes, there's a natural hedge there. I'll let Joe take it from there.

Joe A. Raver

Yes, Dan. Related specifically to coal, we had a mild winter and there's been -- with the really low natural gas prices in the United States, there has been a switch in many power plants from coal to natural gas. And so right now, the coal stocks in the power industry are very high, higher than they've been in a long, long time. So that's affecting our mining customers, and also, power generated with coal is down as well, as natural gas takes its place, and that's impacting our coal power generation customers, mostly in the form of spare parts. And so most of our business in the U.S. in coal, a lot of it is spare parts. So we have seen some softening there. On the natural gas side, the prices of natural gas are low. Pricing drives drilling. Drilling drives use of profits. And so there's a little bit of an imbalance right now in supply and demand. We've seen some of that softness, but we certainly expect the natural gas business to be a really strong business well into the future, both in the U.S. and around the world. And so that's an important business for us and we'll remain committed to that business and think it's a good long-term business on the energy side. Related to coal, the other part of the coal business, as you know, we're really working hard to expand geographically. We've had some nice success in Russia and China and coal usage is going up in other parts of the world. It's declining in the United States, but it's going up in other parts of the world. So we've really focused our energies both on new equipment sales and parts business in other geographies. China is a good example of that. So I hope that answers your question.

Operator

Our next question comes from Clint Fendley of Davenport.

Clint D. Fendley - Davenport & Company, LLC, Research Division

I was wondering on the -- how the foreign exchange might have affected the Process Equipment Group's backlog in the quarter.

Cynthia L. Lucchese

Well, let me jump in quick. First off, the foreign exchange does not have a big impact on us on a year-to-date basis. It's less than $1 million -- actually, less than $0.5 million from a revenue perspective and virtually nothing on the bottom line. In the quarter, we saw a little bit more on revenue. It was around $2 million. So I would say that if you translate that into how it's impacted our backlog, it would be relatively similar, so not a significant impact.

Clint D. Fendley - Davenport & Company, LLC, Research Division

Okay. And a lot of talk, obviously, in the prior question on the technology advancements that we've seen with drilling technology. I just wondered maybe, Joe, if you could speak a bit more how the Process Equipment Group might even be positioned to benefit from what I think is expected to be long-term growth in the development of natural gas here on a domestic basis.

Joe A. Raver

Yes, it's an interesting phenomenon. As Ken said, we -- there's some pluses and some minuses today inside our business. We're balanced across coal and natural gas. So from the natural gas, I mean, it's clearly -- some of the benefits for us is the drilling requires horizontal drilling with fracs. Hydraulic fracturing requires profits to get pushed in there to separate the shale so that the gas can be released, and so we're involved in equipment that produces those profits. And so as more drilling occurs in the United States and around the world, that's good for us from an equipment standpoint as more profits are required. So as I mentioned earlier, right now, with natural gas prices low and stock high, there's been a reduction in natural gas drilling in the United States. But again, we expect that to come back. There's a little bit of kind of supply and demand that needs to catch up, but we expect that to come back in 2013 sometime and level out a little bit more and get back to normal. The other interesting thing for us is that natural gas could be used as a feedstock to create base resins in the plastics industry and there haven't been -- it predates me by a lot, but I don't think there have been any new base resin plants or capacity built in the United States in decades. Most of it has moved to the Middle East and to China, where they're using oil as the feedstocks. But there are now some active projects for base resin plants, plastics plants in the United States, and so we see that as an upside. Those revenues won't come in 2013. They're probably 2014, '15 and '16, but plastics production will move back to North America as natural gas prices are low and it's abundant and it serves as a good feedstock. So we see a little bit of a little positive and a little negative on the coal side. But generally, the move in natural gas in the United States has been positive and we expect that to happen around the world as well.

Clint D. Fendley - Davenport & Company, LLC, Research Division

That's very helpful. Switching over to the Batesville side, I'm just wondering on the recent Aurora sale that we had seen. I know we've heard through our channel checks that they have been out canceling and sort of renegotiating some of their long-term supply agreements with their customers. I'm wondering if you guys expected to benefit from this in the second half of the calendar year.

Cynthia L. Lucchese

I'll go ahead and take that. I mean, obviously, we keep an eye on everything that goes on out in the marketplace and we would like to believe that we're in position with any customer whenever their business comes for renegotiation. And so obviously, we -- for the 15,000 funeral homes out there, we've got our guys out there everyday calling on them and trying to take advantage of those opportunities. We pay attention to what's going on with the customers that we have and those deals that we're working in the pipeline. And while I kind of listen here and there for what's going on with our competitors, we really are driving our own separate strategy on the customers that we're pursuing and working on retaining. So I really couldn't speak to specifically what Aurora is doing. This is one of those industries where there's lots and lots of speculation and rumor, and oftentimes, that's not founded in real factual information. But what I can say is that our guys are out there and they're working those accounts like they always do everyday, calling on both those who are Batesville fans and those that we want to, in the very near future, become Batesville fans.

Operator

Our next question comes from Steve O'Neil at Hilliard Lyons.

Stephen A. O'Neil - Hilliard Lyons, Research Division

I just wondered the -- if you could break down the $4.9 million drop in Batesville sales between price, volume and currency.

Cynthia L. Lucchese

Sure. Steve, it's Cindy. So volume was about $3 million. These are all unfavorable. So volume was about $3 million unfavorable. Our average selling price, about $1.3 million. And then FX, about $600,000.

Stephen A. O'Neil - Hilliard Lyons, Research Division

Okay. And can you comment on your sales performance in Europe and in China?

Kenneth A. Camp

Joe?

Joe A. Raver

Sure. I'm sorry, I want to make sure I heard the question. Comment on sales in Europe and in China?

Stephen A. O'Neil - Hilliard Lyons, Research Division

Yes.

Joe A. Raver

Yes, sure. So a couple things. One is, as we talked about earlier, certainly, Europe has been in a state of flux with quite a bit of uncertainty for some time now. We've seen softness in the European business as our customers are hesitant to invest and to add capacity when the future is so uncertain, but we've been -- that's been around for a while and we're dealing with that situation and continue to adjust to try to improve performance in Europe. Asia as well has been -- goes with Europe a little bit. They're a big trading partner of Europe. We've seen slowing growth in Asia, but we don't have a historical significant presence in Asia, and so our gains in Asia are really share gains where we're growing in that new market. And so we continue to be very pleased by our progress that we've made in China, especially as we've invested there over the last year and a half or so to build our business in China. So -- and related to that, as an example, we just moved to a new facility in China. We've co-located K-Tron and Rotex and so we will continue to expand in China and grow in China. So while the economy there has slowed significantly, our performance there remains very positive because we're growing there as we're relatively new in those markets in a significant way.

Operator

[Operator Instructions] Our next question comes from Jamie Clement of Sidoti.

James Clement - Sidoti & Company, LLC

Ken, I'm not sure if this question maybe should be directed towards you. But in terms of some of the restructuring changes that you all made at Batesville this year and then alluded to during the quarter, I mean, is this -- is your assumptions sort of over the next 2 to 3 years that the mortality rate and the cremation rate returns to sort of the levels that we've seen prior to this year and that this year is an anomaly? Or do you all have any sense, information or opinion that what we've seen over the last 3 quarters is something that may in fact be sustainable for another 4 to 8 quarters or so?

Kimberly K. Dennis

All right. So the way we kind of think about that is, obviously, we've got a long history of studying all kinds of different elements of this marketplace and the size of it and what kinds of trends we've seen over the long term. Certainly, this year is an anomaly in terms of what we've seen over the last 30 years. And while we'd like to believe that that's going to bounce back, and frankly, earlier in the year, we haven't ever seen a year where it's as low as it was in the first half of the year and hasn't bounced back in the second. And we still believe that in our part, over the long-term, that those trends will even themselves back out. However, in the short term, in order to be prudent about our role in the portfolio here for Hillenbrand, we've got to be aggressive about assuming that we may see another part of -- we may see these trends continue and we've got to take actions on our part to variable-ize our costs and to take costs out in every way possible, so that we can make sure that we deliver on our role in the portfolio to generate cash and earnings. So we -- the way we think about it is that we've got to take costs out and create a band of responsiveness, or a bracket of responsiveness, so that when that -- if and when that returns that we've got an ability to quickly respond on the upside. However, if we continue to see downward trends in these rates for a longer period of time, that we are better positioned to respond to that and not have a significant impact on our ability to deliver the earnings that we're committed to.

James Clement - Sidoti & Company, LLC

Very fair, and just a follow-up question if I could. Just an update on the vaults business. Is there any new information there in terms of marketing that product?

Kimberly K. Dennis

We've continued to see growth in the vault business this year. We've actually brought out some products in the lower end of that line in order to make sure that we have a full portfolio, both in terms of price and also in terms of things like size, width, those type of things. So we do have -- we have expanded that line and are seeing some nice pick-ups in the markets that we have launched into. I think that I've discussed on other calls that we've moved into specific geographic areas in order to be more effective at how we deploy. And we have continued to see pick-ups in those areas, and we've continued to invest and grow the number of folks that we have supporting our specialty sales force there and the training that we're doing with our existing sales force in those markets. Still small, but growing. And we continue to take that opportunity.

Kenneth A. Camp

Jamie, it's Ken. If I could add something to the -- Kim gave a very good description of what she's doing and what our team is doing with capacity. But I'll remind you of Batesville's long history of using lean to do more with less, to get more throughput in the brick-and-mortar that they have, and that work continues. So whenever we have taken some element of capacity offline, it's with the full knowledge that we have the ability to respond to improvements if and when they come, for example, spikes from influenza and so on. So they have full capacity to flex their production and handle what they need, but that's been one of the things that's really helped Batesville over the years drive greater efficiencies in their business. So if you combine those 2 thoughts together, their ability to do more with less without adding brick-and-mortar and being on the safe side if, for example, the death rates stay low. I think she's got it positioned exactly the way it needs to be positioned.

Kimberly K. Dennis

Yes, I would characterize that as plan for the worst and be able to respond to the best.

Operator

Our next question is a follow-up from Daniel Moore of CJS Securities.

Daniel Moore - CJS Securities, Inc.

One quick follow-up. Ken, the long-term strategy, obviously, is to take the strong cash flow from Batesville and reinvest in attractive businesses. I'm just wondering with the stock at 10x earnings or below and offering a 10% per cash flow yield, why might you not consider investing in your own stock through share repurchases which offer, obviously, a pretty attractive return at essentially no risk?

Kenneth A. Camp

It's a very good question and one that we consider all the time. In fact, at our -- every quarterly board meeting, we have some discussion of how we're using our cash and how that fits with the long-term strategy and the near-term opportunities. And quite frankly, buying one stock back and boost the stock price and it makes everyone feel pretty good for a couple of years. But generally, they return tails off in 1.5 year or 2 years. And long-term, it pales in significance to the opportunity to grow. So when you balance that every quarter, when we look at what are the best opportunities, this is considered by the board. They're the ones that make the decision for that, although we make the recommendation there. They're the ones that watch out for shareholders. So I can assure you it's being looked at and it's a consideration, but we remember our long-term viewpoint as well.

Operator

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

Chris Gordon

Once again, thank you for joining us today. So we look forward to speaking with you in November for our next call, where we will discuss fourth quarter and fiscal year results. Have a great rest of the day, everyone. Thank you.

Operator

Ladies and gentlemen, this does conclude today's conference. You may all disconnect and have a wonderful day.

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