Hillenbrand Inc (HI) 2008 Q2 法說會逐字稿

Good afternoon, everyone, and welcome to do the Hillenbrand Inc. second-quarter 2008 earnings conference call. Today's conference is being recorded and will be available for replay through May 27, 2008 domestically at 888-203-1112 and internationally at 719-457-0820. For the replay, callers will need to use confirmation code 9845397. Now, if you are unable to listen to the live web-cast or the replay, the call will be archived at www.HillenbrandInc.com through May 12, 2009.

If you choose to ask a question today, it will be included in any future use of this recording. Also note that any recordings, transcript, or other transmission of the text or audio is not permitted without the written consent of Hillenbrand Inc.

Now, at this time, it is my pleasure to turn the call over to conference over to Mark Lanning, Vice President of Investor Relations and Treasurer. Mr. Lanning, please go ahead.

Thank you, Kevin and good afternoon, everyone. With me today are Ken Camp, our Chief Executive Officer and Cindy Lucchese, our Chief Financial Officer. We would like to personally welcome you to our first earnings call as a separate public company. 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 Form 10-K and 10-Q. We do not undertake any obligations to update or correct any forward-looking statements.

Now let me provide some information regarding our call. We have scheduled one hour, and we will start with prepared remarks that should last about 25 minutes. We will then move directly to question-and-answer after -- question-and-answer period. After the call, if you have follow-up questions, please don't hesitate to phone me at 812-934-7256, or e-mail me at MRlanning@Hillenbrand.com.

We have a lot to discuss today, so I'll turn the call over to Ken Camp, the President and CEO of Hillenbrand Inc. Ken?

Thank you, Mark. Hello, everyone, and thank you for participating in our inaugural earnings call this afternoon. Since we have been public for just about six weeks, I will begin by providing an update of the spin process and our initial progress as a public Company. I will also provide a brief overview of our Company for those on the call who are new to us.

We will then share the highlights of our quarter's performance, an update on our key initiatives, and our outlook for the balance of the year. Cindy Lucchese will then provide further details regarding our financial results, including guidance for the full year. I will close the call with a discussion of our planning process regarding future strategy, and finally Cindy and I will respond to your questions.

As those of you who followed Hillenbrand industries, now renamed Hill-Rom Holdings well know, the spin process took a long time and involved a great deal of work. And on April 1st, we began trading on the New York Stock Exchange as Hillenbrand, Inc.

Although Batesville Casket Company had previously functioned for many years as a fairly autonomous operating division, we were not staffed to perform all the functions of a stand-alone public company. Once the spin date became certain, one of my primary tasks was to recruit top talent for the key corporate leadership positions. Our general counsel, John Zerkle, and Investor Relations and Treasurer, Mark Lanning, were internal selections. The heads of human resources, Doug Wilson; Finance, Cindy Lucchese; and our Chief Accounting Officer, Ted Haddad, were recruited from outside.

And just a few days ago, we announced that Joe Raver will join us as President and Chief Operating Officer of our Batesville Casket division. Joe has ten years experience with Batesville in a variety of leadership positions and he knows our industry well. Most important, Joe is a talented executive with a successful track record. In short, I'm delighted to have someone of Joe's caliber lead the Batesville Casket Company as I focus on public company responsibilities and on forging our strategies to grow long-term shareholder value.

Although the majority of our senior staffing is complete, I am pleased with our progress of selecting A-level talent. Although we have a few positions yet to fill, we are making progress and will make those announcements at the appropriate time.

During our road show in the last half of March, we met with a large number of investors in cities around the country, many of whom are on the phone today. In those meetings, there was a great deal of interest in our long history of steady and profitable growth, strong and stable cash flows, and our recession-resistant environment, all qualities which are especially attractive in these challenging economic times.

For those less familiar with us, it would be useful to provide a few key points regarding Hillenbrand Inc. and our subsidiary, Batesville Casket Company. I know that might be a well-known story to our existing long-term investors, but I ask for your patience as we take a few minutes to introduce our company to those on the line who are first timers.

We are the leader in the funeral products industry with an unrivaled brand and a 100-year heritage of serving funeral homes with innovation in product, in burial and cremation products. Our distribution network is world-class and provides a level of service and responsiveness that our customers rely on every day to serve their families throughout the United States and Canada. We believe this capability is a competitive advantage as society and our customers place increasing value on speed and personalization.

Our manufacturing expertise, which is based on the Toyota lean manufacturing process, is, indeed, a core competency for us, an opinion which has been verified by the award-winning performance of many of our plants. Our relentless focus on continuous improvement has enabled us to produce industry-leading results in less time with better quality, and to offset at least some of the commodity cost increases that industry has faced in recent times.

The significant competitive strength is the large base of enduring and strong customer relationships that we have forged over the years. Thousands of our customers are multi-generational family businesses and our support programs, such as the successful merchandising initiatives, help these customers improve their profitability while better serving their client families.

We believe we will see future industry growth as a result of an increase in deaths in upcoming years due to what has been called the graying of America. The industry has experienced a death trough over the past 10 years, resulting from a low point in births 75 to 80 years ago. Many industry experts believe the acceleration in births in the late 1930s and the subsequent increase in births to over 4.3 million per year in the mid '50s is the foundation for a corresponding increase in deaths in upcoming years. Although no one can accurately predict the timing, we're prepared to handle increased demand for caskets and cremation products without significant investment.

We have demonstrated our ability to achieve steady results and execute our business plans by providing superior value to our funeral home customers, and by utilizing our scale and scope to effectively manage costs in an environment where commodity prices are increasing. These capabilities have yielded a strong balance sheet, steady profitable growth and consistent cash flow, all of which position us for reinvestment in strategic opportunities and capital return to shareholders.

In summary, we believe we are an attractive investment proposition. Many of you have noted that we are in a recession-resistant industry and that we have an above-average dividend payout ratio.

On April 30, our Board approved our third-quarter dividend of $0.1825 per share, which translates to an annual dividend of $0.73 per share. This represents a yield of around 3.5% based on yesterday's closing share price.

Now that our brief commercial is complete, I would like to turn to a short summary of the second-quarter results. As you can see by our press release, and which we explain in more detail in our 10-Q, we posted solid second-quarter results. Despite the demands of preparing for and executing the spin, our management team remained focused on the core business, as illustrated by our financial performance. During this period, we recorded year-over-year revenue growth of nearly 6% and cash flow from operations of nearly $27 million.

To some degree, the second-quarter sales were influenced by a more normal pneumonia and influenza season than we have seen in the past few years. However, we were prepared to capitalize on the market conditions and we believe our results reflect more than just the effects of the rates. Over the next couple of minutes, I will give you a high-level summary of the initiatives which our teams are working on.

Our sales force continues to implement Batesville's proprietary assist merchandising system. This portable, kiosk-based touchscreen information system is easy to use, and it provides a client families of our customers with better product and feature information in a comfortable and relaxed manner, often without the funeral director even being present.

Not only are informed consumers more satisfied with their purchase decision, they often select more features and higher quality products when using this system. This benefits our customers by providing a way for them to grow revenue in the current relatively flat market. It also contributed to our revenue growth in the quarter by improving our average sale with merchandise customers and by helping offset the mix impact of introducing some products at lower price points. While we're still in the early stages of this initiative, the beginning results are encouraging to our customers and to us.

Our second growth initiative is to expand our business with independent, regional funeral home consolidators and with key accounts. We have added sales coverage in those areas of greatest opportunity, and have earned business with several new customers in this segment. While the regional consolidators are currently a small percentage of our overall revenue base, sales to this group have increased at double-digit rates over the second quarter of last year. As cremations continue to grow, we must increase our capabilities to help customers better serve families who offer cremation as their choice for final disposition.

Our Options by Batesville team made great progress towards their growth objectives in this quarter, and we are investing in this part of the business, and the new team is conducting research among consumers and customers to seek ways to grow this segment at rates in excess of the market.

As many of our investors know, we entered the distributor channel in 2005 with our Northstar product line, with a focus on providing products for other manufacturers and distributors in the casket industry. The Northstar caskets are clearly differentiated from Batesville-branded caskets and contain none of the Batesville proprietary features. This distribution channel is new for us and our Northstar sales team as well, a team which is independent of the Batesville sales organization and is making progress with distributors who have long viewed us as their competitor. While still a very small percentage of our overall revenues, Northstar unit sales are also up at double-digit rates over the second quarter of '07.

While we offer our customers a very broad product line, Batesville's historic strength has long been in the better casket price points. We are very cautious to guard the elements which define the Batesville brand and continue to offer a wide range of features which demonstrate greater value as the price points ascend. However, we recognize that some customers have a need to offer lower price points to serve families of modest means or reduced expectations.

To meet that need, we introduced the new [Aries] product line in the latter part of the quarter. This group of five low-end, carbon-steel products designed to broaden our offering in this highly competitive segment. While this entry is expected to generate increased volume, it will also have the effect of lowering the average mix. Despite this decrease in mix, what is most important is that such lower price introductions increase the total margin dollars.

Now let's take a look at the remainder of the year. In the second half of this year, we will make additional investments in driving profitable top-line growth in the casket and cremation business by bolstering our marketing group. These investments will increase our understanding of changing consumer needs and lead to new products and services to help our customers meet those needs. As we gain added marketing traction, I will update you on future calls.

Finally, I would like to comment on our operational outlook for the remainder of the year. As many of you know, our business is somewhat seasonal, and historically, the second quarter is our strongest for the year, with the third and fourth quarters typically being the lowest from a revenue standpoint. We currently see no reason why this market trend would deviate substantially from past years. Additionally, these are uncertain economic times, and we, along with many other businesses, have been challenged with rising fuel costs and costs for certain commodities.

We expect these costs to continue to rise during the year, and we also expect to see increases in the prices we pay for steel and red metals. We believe our continuous improvement initiatives in manufacturing will mitigate such effects, but will not completely offset their negative impact.

In summary, this has been a good quarter for us. The core Batesville casket business showed very solid results while compensating for some headwinds in the form of inflationary pressures. We are invigorated by the reception that we have received as a new public company and we are cautiously optimistic about the casket information business for the future. Now I'd like to turn over the discussion to our CFO, Cindy Lucchese. Cindy?

Thank you, Ken. Before I discuss our operating results for the quarter, I thought it would be useful to highlight the principal differences between our operating result as a division of our former parent versus our results as a separate, stand-alone public company.

Those differences are best summarized as follows -- as a new public company, we will now incur costs to manage and run the corporate functions that were previously provided by our parent company. During the first half of 2008, we received allocations of about $7.5 million from our former parent company for corporate services they provided to us. In addition, during this period, we also incurred direct costs of $1.5 million, resulting in total corporate expenses of $9 million for the six-month period.

We believe these expenses will be in the range of $10 million to $11 million for the second half of the year for a fiscal year 2008 total of $19 million to $20 million. Because these costs include some charges, we would not expect to incur on a go-forward basis our expectation for 2009 is that these costs will be in the range of $17 million to $19 million.

Our former parent transferred to us investments in private equity limited partnerships and common stock with a carrying value of $27.9 million, and a note receivable from the Forethought Financial group with a carrying value of $124.6 million. Going forward, we will recognize interest and income from these investments. The annual anticipated income from the Forethought note is a little more than $11 million of non-cash income.

Our former parent also transferred cash to us, including a receivable for cash that was paid in April, and short-term investments with a total value of $196.6 million. Note these items are income producing and will be utilized by us for general corporate purposes.

As of March 31, 2008, we also borrowed $250 million of our $400 million revolver to fund a distribution to our former parent. We paid down a portion of this borrowing in April, but will continue to incur interest expense on any outstanding borrowings in the future.

Now, let me touch on some of the drivers of our results in the second quarter. Sales for the quarter were $191.4 million, a 5.6% increase over sales of $181.2 million in the same period a year ago. The increase reflects market growth due to a more typical pneumonia and influenza season that we have experienced the past few years as well as price realization and the impact of our merchandising initiative.

We also benefited from the strength of the Canadian dollar versus the U.S. dollar. These positives were offset by a negative mix impact due to the introduction of lower price point units, as well as a continued downward trend in mix in some of our non-merchandised accounts.

Gross profit dollars increased $3.2 million versus the same period a year ago, reflecting the positive impact of increased volume and price realization. However, our gross profit percentage was 43.5% versus 44.2% a year ago. The small decline is largely due to higher costs for fuel, red metals, and healthcare, as well as negative mix impact.

Operating expenses increased $14.1 million year-over-year to $42.3 million, although all but about $1.2 million of this increase was a result of the separation costs incurred with the spin off. The balance was due primarily to new staffing related to our sales and marketing initiative, healthcare costs and corporate staff additions to support our public company needs, offset in part by a bad debt recovery.

Our tax rate for the quarter was 42.9% versus 36.2% a year ago. The change is due to the fact that many of our separation costs are nondeductible expenses. Net income for the second quarter was $23.3 million, or $0.37 per diluted share. This compares with net income of $33.3 million, or $0.53 per diluted share in the same period a year ago. Excluding the nearly $13 million in separation costs and antitrust costs, our net income in earnings per share would have been essentially flat with a year ago.

It is important to note that operating results for our core Batesville Casket operation, excluding any effect from the separation and new corporate costs, showed a solid growth rate in excess of our revenue growth rate for the quarter. Cash flow from operations was $26.8 million in the second quarter.

And now I would like to turn to the balance sheet. We ended the quarter with cash and cash equivalents of $126.9 million, a receivable of $15.4 million, representing cash due from Hill-Rom, which was paid in April, and short-term investments representing auction rate securities of $55.3 million. Our auction rate securities are all AAA-rated investments, primarily in state student loan funds that we hold as available for sale securities. Despite the fact that the underlying investments are AAA-rated, we have provided for a 3% loss reserve included in accumulated other comprehensive loss due to the liquidity challenges resulting from sale of auctions. We plan to hold these investments until they can be sold for full value.

Also, as of March 31, we had outstanding borrowings on our $400 million revolving line of credit of $250 million. In April, we paid down $75 million of these borrowings, leaving a current outstanding debt balance of $175 million.

And now, I would like to turn to guidance. We are reaffirming the fiscal 2008 guidance provided in March as part of our investor presentation road show material. This guidance is also consistent with the guidance we gave as a division of our former parent in February 2008.

We continue to expect net revenues to range from $668 million to $686 million. Income before taxes to range from $131 million to $149 million. Our tax rate to range from 38.1% to 38.7%. Net income to range from $80 million to $93 million. And with our diluted shares outstanding of 63 million, diluted net income per share of $1.27 to $1.47. Net income excluding nonrecurring charges is expected to be $103 million to $113 million, or $1.64 to $1.79 diluted net income per share. The nonrecurring expenses, including antitrust costs of approximately $11 million to $13 million for the year, and separation costs of approximately $16 million to $18 million that were incurred by us or allocated to us by our former parent. As I mentioned earlier, a portion of the separation costs are not deductible for tax purposes, resulting in our higher effective tax rate for this year.

Now, I would like to turn the call back to Ken for his concluding remarks. Ken?

Thanks, Cindy. In summary, we are pleased with our results this quarter and are encouraged by the results in our core Batesville business. As we all look to the future, it's natural for current and potential investors to have a great interest in how we plan to increase long-term shareholder value as a separate public company. This is our number one priority, and we are now in the process of developing a long-term strategy for Hillenbrand. We have completed a very detailed assessment of the death care industry and our core competencies and are now in the process of identifying a range of potential growth opportunities.

We're working very closely with our new board in this strategy development process. The creation of a sustainable strategy to grow shareholder value is an important endeavor, and doing it right is much more important than doing it quickly. We are moving with all deliberate speed, and as strategic decisions are finalized, we will share them with you through timely and transparent communications.

I very much appreciate the patience of our investors in this process. Thanks also for joining us today, and we look forward to seeing many of you in the upcoming weeks and months as we visit investors around the country and host visits here in Batesville. Now Cindy and I will be glad to take your questions. Conference operator, will you please open the lines?

(OPERATOR INSTRUCTIONS). Steve O'Neil, Hilliard Lyons.

Just wanted to clear up something on how I need to treat some of these corporate costs. You referred to incremental corporate costs of $2.6 million in the quarter. You also referred to costs that were allocated from Hill-Rom. And I just want to make sure I understand the accounting treatment because I didn't think you could, on a pro rata basis, allocate corporate costs to a discontinued operation. But the transaction may be structured in a way that it allows you to. I just want to make sure I know that I'm putting these costs where I should. And then also, did the $2.6 million incremental costs actually occur, or was that allocated? Thank you.

Hello, Steve. It's Cindy Lucchese. I will take the question. First off, the discontinued operations does not impact us. That is a -- will show up as discontinued operations in Hill-Rom's financials, so that's something that you would need to review with them in terms of how they're handling that, but it does not impact our financials.

Secondly, basically, half of those costs or about $1.3 million related to allocations from Hill-Rom. The other $1.3 million related to costs that we incurred on our own as we prepared to become a separate public company.

Okay. Then also on the -- when you described the various notes and cash, short-term investments and various items on the balance sheet, did those impact the quarter? Or did they -- were they basically transferred on March 31 but did the investment income and interest expense -- would they have begun to occur subsequent to the end of the quarter? Or did you see them during the quarter?

Yes, Steve, those were transferred effective March 31; so our next quarter earnings report, you'll see the investment income relating to those investments. But there wasn't anything in there for this quarter.

It was the interest expense and invested income showing up in the third and the fourth quarter?

That's correct.

Okay. Thank you very much.

(OPERATOR INSTRUCTIONS). Jack Ripstein, Potrero Capital.

Thank you for taking my call. Following on a similar vein as the prior caller, I want to understand the costs incurred in the spin-out, those are one-time in nature, correct? And then going forward, you discussed your, let's call it G&A expectations as we go into 2009. I assume those similar expectations are baked into your guidance. If this question is making sense, but I'm just trying to understand the one-time in nature versus ongoing costs.

Correct. And let me explain that a little bit further. Again, this is Cindy. What happened, basically, is we have two different kinds of costs. One is the separation costs that related to the actual separation, and we shared those costs with Hill-Rom. Those are things such as our investment banking fees, attorney fees, etc.

I'm sorry just to interrupt, but that's the $12.9 million that was pointed out in the press release, correct?

That's correct.

For the quarter? Okay. Great.

So that's that piece. Then there's a second piece, which is our becoming a separate public company and we needed to create the right infrastructure and corporate structure so we could handle that. And basically there's a couple things going on there.

One is the fact that we used to have that support from Hill-Rom. So for the first part of the year, we weren't getting allocations from them. At the same time, we were building up our own public capabilities, and that's why we also had our own costs. So as I mentioned to the earlier caller, we had $1.3 million that was allocated from Hill-Rom along with our $1.3 million that we incurred in the quarter.

And so your guidance going forward now assumes all of your own public company expenses, correct? You are not on their systems any longer?

Correct. But for this year, our costs will include the allocations that we received from Hill-Rom this year along with the costs that we will incur.

Okay. So --

And those in total are the $17 million to $19 million.

For next year?

For next year, right, on 2009 go-forward basis.

But all right, that's your G&A component only?

Correct.

Okay, got you. And so, that makes sense. And then in terms of any sort of ongoing operations, you are no longer like on their ERP system or anything like that. Is that correct?

Jack, this is Ken. We have had a separate ERP system for a great number of years. The only commonality we have in IT is the servers; we share servers. But that's rather common for people to rent space on servers.

Got you. Okay. And then one more question if I could. In terms of -- you spoke about commodities, etc. Are you guys in any hedging programs or anything to that effect? Or can you pass on some of the costs? Could you just discuss that and your views going forward on that?

Yes, from a commodity standpoint, we do not have any what you would consider to be a direct hedging program. We, of course, do hedge our foreign currency exposure. But from a commodity standpoint, what we have done in the past, we have, particularly with our red metals, is we lock our pricing in through contracts that go anywhere between 12 to 18 months. We are certainly exploring -- continue to monitor that and explore ways to try to hedge those risks, either through contracts or through the markets. And, of course, we are well aware of the issues that we have experienced there and we'll continue to monitor that.

Okay, great. Thank you very much.

(OPERATOR INSTRUCTIONS). [Mahart Kapoor], Credit Suisse.

Just on the balance sheet, in terms of the payable to Hill-Rom Holdings, is that a cash payable? And does that pretty much just offset the receivable that you already got in April? And have you already paid that $20 million?

The payable to Hill-Rom Holdings, I assume you are talking about the due to Hill-Rom Holdings. The principal thing there is $19 million, roughly, of tax payments that we need to pay them as part of the settle up from the spin-off.

And you haven't paid that already, right?

No, but we will be paying that over the coming months.

Okay. And I guess the other question, probably directed towards Ken, is just in terms of some of the growth opportunities you touched upon, Ken, in terms of the Board and you guys looking over these any longer term, can you perhaps give some kind of color in terms of how you are thinking about these things, what kind of return on capital kind of metrics you're looking at, those kind of things?

Well, I can tell you broadly we obviously like opportunities that fit with our core competencies in terms of our ability to manufacture, distribute products and those sorts of things. So as I've said in the road show, I think it's unlikely anybody would ever see us making cell phones or something like that.

We recognize also that we have a business that has a very, very high return on invested capital. And we've built that business over a long period of time. So while we like very nice returns, it's not likely that we would find too many opportunities that exceed that or match it. However, we're going to be very prudent in the things that we look at and very thoughtful as we go forward. We will tell you more about it as we go along.

Thanks, guys.

With that, ladies and gentlemen, there are no other questions. I will turn things back over to Mark Lanning for additional or closing comments.

That is the end of our call. We appreciate everyone for joining us this afternoon. And if you have any follow questions, once again, feel free to give me a call or to give us a call. Thank you for joining us.

With that, we will conclude today's teleconference. Again, thanks for joining. Have a good day, everybody.