Hillenbrand Inc (HI) 2009 Q2 法說會逐字稿

Good morning everyone and welcome to Hillenbrand's earnings call for the second quarter of 2009. Today's conference is being recorded and will be available for replay through Midnight Eastern time Monday, May 25, 2009 domestically at 888-203-1112 and internationally at 719-457-0820.

For the replay, callers will need to use confirmation code 735-2147. If you are unable to listen to the live audio webcast, it will be available at www.HillenbrandInc.com through May 10, 2010.

If you choose to 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.

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

Thank you Donnie and good morning everyone. With me today are Chief Executive Officer, Ken Camp; and Chief Financial Officer, Cindy Lucchese. Welcome to our second-quarter earnings conference call.

During the course of today's conference call and the question and answer session that follows, we may make projections or other forward-looking statements that are subject to the Safe Harbor provisions of the securities laws regarding future events or the financial performance of the Company. We caution you that these statements are only our view of the future and that actual results may differ materially.

We also alert you to the risk described in the documents we file with the Securities and Exchange Commission such as our annual and quarterly reports on Forms 10-K and 10-Q. We do not undertake any obligations to update or correct any forward-looking statements. Now let me provide some information regarding our call.

We have scheduled one hour and we will start with prepared remarks that should last approximately 20 minutes. We will then move directly to the question-and-answer period. If you have follow-up questions after the call has ended, please do not hesitate to call me at 812-934-7256 or e-mail majorette we had them at mrlanning@Hillenbrand.com.

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

Thanks Mark. Good morning everyone and thank you for participating in the call today. I'm going to start by giving you a brief overview of the highlights of our performance for the second quarter of fiscal 2009 which ended March 31. Then I will share with you some insights regarding the funeral services industry and steps we are taking to optimize our results in this difficult economic environment.

I will then turn the call over to us Cindy Lucchese for details about our quarterly financial results and then I'll wrap pup the prepared portion of this call with some closing thoughts. And after that, Cindy and I will be available to take your questions.

Net revenues for the quarter were $170.8 million, down 10.8% from results in the second quarter of the prior year. This decline was driven by several, primarily market related, factors and I will talk more about them in a few minutes.

Despite the soft volume, our other results for the quarter were solid with net income growth of 19.3%. Earnings per share grew 21.6% which represents an increase greater than net income because of the modest repurchase of Company stock over the past few quarters. Cindy will describe the non-GAAP effect in greater detail in a few moments.

Gross margins of 43.5% were equal to the prior year's results and consistent with our historic performance. Cash flow from operations of $28.3 million increased 5.6% over the same period last year.

We also paid a quarterly cash dividend of $0.185 per share in March reflecting an annual dividend Rate of $0.74 per share. Cindy will soon give you a more in-depth look at our financial results and some of the key drivers behind them, but first I would like to take this opportunity to talk with you about the funeral service business and some of the changes we have seen in recent months.

You have seen our results and I'm sure you've seen the results of the other public companies in the industry and based on those disclosures, and on other data we have available, we are seeing a very consistent picture throughout the industry. After a decent first quarter, a number of conditions came together fairly quickly and with some overlapping effects to yield the soft volume and revenue that I mentioned a moment ago.

The first and most significant condition was a relatively mild flu season which reduced the number of deaths all across North America. The second condition which affects total casket demand is the number of families who opt for cremation.

In the past 15 years or so, cremations have increased at about 120 basis points each year with current cremations representing about 38% of deaths. This trend which has historically closely followed an S curve has long been very predictable.

Most of us have seen the numerous anecdotal reports of some families turning to cremation because of the psychology of consumers in this difficult economy. Although there is no timely and accurate source of abroad cremation data, you can see that some of the public funeral service providers are experiencing cremation growth rates higher than typical, a phenomenon that many independent funeral homes are reporting as well.

The third condition which affects our revenue is the average selling price of products we sell. Again, we are hearing reports of the effects of the economy on the amount some families are willing to spend on the casket. We believe this has had some negative effect on our quarterly results as the country has suddenly shifted from a nation of borrowers and spenders to one of cautious savers in the face of economic uncertainty.

We observed that our customers who have implemented the Batesville Assist merchandising system have experienced substantially higher average selling prices and volumes than non-merchandise funeral homes even in this down market. As all casket companies experience the same conditions, although to varying degrees, the level of price competition has increased recently. Pricing has become aggressive, initially from the smaller regional competitors as they have sought volume in the lower and most price competitive product segments.

In the face of this heightened price competition, we have responded with targeted sales programs tailored to specific customer types and specific products. We continue to closely monitor the results of each effort and adjust our offering as necessary to meet competitive actions.

Our objective is to defend our position as aggressively as necessary. We also responded quickly on the cost side of the business to match our production with demand. Our historic lean business practices involve adjusting production rates as seasonal demand fluctuates so that we do not overproduce and increase inventories. This is a practice we undertake regularly to ensure that we run as efficiently as possible.

However, because of the conditions I just described, this spring's production adjustment was larger than normal. This will result in (technical difficulty) approximately 5% of our front-line manufacturing associates across the operation, a significant number of whom opted for early retirement.

We have also adjusted other spending accordingly with the exception of those efforts which directly affect revenue. Before Cindy presents the more detailed financial results, I'll give you a brief update on the status of the antitrust lawsuits.

We reported in March that the US District Judge has upheld the magistrate judge's memoranda and recommendations to deny class certification in both of those suits. The plaintiff then had the option to appeal the order.

The casket store plaintiffs chose not to appeal and agreed on April 29 to a court order dismissing the case with prejudice. We obviously are very pleased that the case has been dismissed as it avoids any further cost for that case.

In the consumer case, the plaintiffs filed for permission to appeal the district court's order and now it's up to the Fifth Circuit Court of Appeals to grant or deny that request. We expect to find out whether the Fifth Circuit has accepted the appeal in the near future. We are prepared to continue to defend our position if the court permits the plaintiff's request for appeal.

Now I'd like to turn over to discussions to our CFO, Cindy Lucchese.

Thank you Ken. I would like to provide some additional detail and perspective behind our second-quarter results. As we reported April 9 in our earnings pre-release, sales for the quarter were $170.8 million, a $20.6 million decrease from the same period in the prior year.

As Ken told you earlier, this was primarily driven by a decrease in the number of burials compared to the same quarter in 2008. In addition, we are seeing the growing impact of mixdown in casket purchases which may be exasperated by the current economic environment.

Unfavorable foreign exchange rates, particularly for the Canadian dollar, also reduced revenue by nearly $3 million over the prior year. Our gross profit margin percentage held steady at 43.5% equal to the prior year's results.

Higher ASP's played an important role in maintaining margins along with cost savings of $4.8 million, including lower costs for health care and workers compensation as well as savings from productivity improvements. Cost for fuel decreased by $1.7 million versus prior year while commodities, particularly steel, increased $2.8 million in the same period.

We anticipate favorable overall margin trends in the latter half of 2009 compared to the spikes in fuel and commodities we saw in the last six months of the prior year. Operating expenses of $29.6 million increased just 0.7% year-over-year excluding nearly $13 million in separation costs incurred in the second quarter of 2008.

We continue to aggressively manage our cost structure during these difficult economic times. We incurred $400,000 in interest expense for the quarter compared to no interest expense for the same period in the prior year. We only began to pay interest in the third quarter of 2008 when we made borrowings under our revolving credit facility.

Our outstanding borrowings on March 31 were $115 million under our $400 million revolver at an average interest rate of 0.9% and we paid it down to $100 million in April. Our tax rate for the second quarter was 35.4% which is 17.7% lower than the 43% incurred in the prior year. This is due to separation costs we incurred a year ago that were not deductible for tax purposes.

Net income for the quarter was $27.8 million or $0.45 per fully diluted share compared with net income of $23.3 million or $0.37 per fully diluted share in the previous year. Earnings-per-share increased 21.6% while net income increased slightly less at 19.3%. This is due to a reduction in average common shares outstanding as a result of our purchase of $6.2 million worth of shares during the quarter as well as the anti-dilutive impact of share repurchases in the prior year.

Investment income was a negative $1.3 million in the quarter versus a negative $100,000 in the prior year. The primary driver for this number was a net write-down of $4.5 million from limited partnership investments transferred to us as part of our separation from Hill-Rom last year.

These losses resulted from decreases in the fair value of the investment portfolio of these partnerships. The volatility may be more pronounced in the current economic environment as the underlying portfolio companies struggle with operational and liquidity issues.

We also recorded $3.1 million in investment income related to our [forethought note] and $400,000 in interest income related to our auction rate securities, net gains and [put right]. Cash flows from operations were $28.3 million versus $26.8 million in the same period last year, an increase of 5.6%.

Finally, I would like to reaffirm the guidance we released a month ago on April 9. At that time, we adjusted revenue guidance downward to 650 to $670 million from 695 to $710 million, reflecting the industrywide decline in the demand for caskets.

At the same time, we raised fully diluted earnings per share guidance to a range of $1.57 to $1.70 from prior guidance of $1.54 for $1.66. This includes the pre-tax reduction and antitrust litigation expenses of $11.5 million, resulting from favorable proceedings in these cases.

Excluding non-operating costs primarily related to the antitrust litigation, we estimate diluted earnings-per-share will be between $1.65 and $1.78. Our revised guidance represents our best estimate if performance but in these unprecedented economic times, our revenues which are normally fairly steady, have become more difficult to predict.

In addition, limited partnership investments could remain volatile and the effects of any gains or losses are not included in our guidance. Now I would like to turn the call back to Ken for his concluding remarks.

Thanks Cindy. Before we conclude, I would like to give you a brief update on the acquisition strategy we described during our investor conference last December.

The business development team has been hard at work refining and implementing our plan to assess both the death care and manufacturing industries as well as to evaluate potential acquisitions and other opportunities in new business development. We don't have anything specific we can report at this time other than to say we remain committed to the strategy that we presented to you previously.

In summary, even though the economy has affected us more than in the past, we have been able to achieve stretchable results for the quarter. We also saw continued softness in April although our sales initiatives combined with the end of the typical flue season have helped us to bring volume and revenues more in line with both expectations and the prior year's results.

Still, it's important to remember that in this difficult and unprecedented economy, we find it more difficult than normal to project our results with the typical degree of confidence. We're taking decisive and targeted actions to protect our market position and to manage successfully through this downturn.

These actions include focused sales programs and careful management of cost without inhibiting growth initiatives. We continue to look for opportunities to invest in the Batesville Casket brand and we're making progress in the pursuit of our growth strategy.

Our primary objective is to user capabilities to help our customers profitably serve their client families in these very challenging times. Thanks to all of you for joining us the call today and now Cindy, Mark and I will be glad to take questions. Conference operator?

(Operator Instructions) Jamie Clement, Sidoti & Co.

Ken, I was wondering if you could provide a little extra color on the competitive environment with a little more detail maybe on what you're seeing at the lower end of the price point market versus what you are seeing kind of higher up.

I can tell you what I know at this time which is a business that is typically quite competitive that I think everyone knows there's more capacity than demand in the casket business and has been for some time, it has heated up. Whenever this many manufacturers and distributors are kind of typically dependent upon a flu season and it doesn't come, it increases the pressure on everyone.

Those that have a lot of inventories want to liquidate those inventories or monetize them and that's what we saw at first. It was originally smaller distributors at the lower-end price points, frequently what are referred to in the industry as non-gasket and steel, the cheapest price points.

However, I think there's some signs that that has spread upward a bit. It's not as clear a picture, but we have seen behavior like this before when there is not a flu season as folks want to get rid of inventory and hopefully see an opportunity -- or they hope to see an inventory to improve their competitive position. Our response is to be assertive as appropriate but also keep the long-term in line.

Okay, and then following up, I know it's not a huge percentage of your revenue, but the cremation rate has picked up perhaps for economic reasons. How have your -- the cremation options that you guys -- those products that you sell, how have those performed in this environment? I know you had a lot of new products out, a lot of new products planned and I was just curious for an update of that.

Good question. Generally the new products are going very well. They're quite creative and funeral decorators and families have responded to them very nicely.

First of all, when you have -- in some ways, although we don't treat it this way, the options business or the cremation business is kind of a hedge business. As more and more families select cremations, we can get some revenue and provide some services there.

However, when deaths are down as much as they are and our algorithm show that they're down probably just a bit under 50,000 compared to the prior year to date, what that does is it affects caskets by a number very similar to that. But it also, even though the cremation percentage goes up, the number of cremations also goes down, driven more heavily by the large death number. That's the big lever.

So if you jump off of that, I can tell you that our volume is up in the cremation business even though the total number of cremations this year is probably flat to slightly down. The mix -- there is -- even in cremation, products there is a slight mix down. We think it's probably a recession impact.

That means revenue in that segment was down more slightly -- or down slightly. There are a couple of other factors I don't know that anyone understands very well. But we believe that -- this is mostly based on anecdote -- there are not a lot of good cremation data out there, that there are more direct cremations in this case. Families simply do not have the wherewithal, maybe going right for the lowest priced option that they can get during this time.

That makes sense. Thank you all very much for your time.

Clinton Fendley, Davenport.

Cindy, I wondered if you could remind us for the quarter what the dollar impact was from the volume and mix shift and also pricing?

Absolutely, I'd be happy to do that. Pardon me, Clint. I didn't have it handy.

That's okay. Ken, maybe also just the plant that you guys have in Mexico City, is that now back up and running currently?

Yes, the one in Mexico City is a very small plant that manufactures products almost exclusively for the Central Mexican market. Mexico City took a long holiday weekend recently.

Our larger plant is in Chihuahua and that plant has been functioning well although they Participated in the four-day holiday. The report we got just the other day was there thus far have been only a half dozen or so cases of swine flu in the entire state of Chihuahua and we haven't had any employees involved thus far.

Clint, I have got your numbers for you. So volume was $23.3 million negative. Mix was $3.3 million negative and then price was $8.7 million positive.

As you look forward here, what is your expectation on the pricing for the remainder of the year here given the tough economic conditions?

Clint, we don't really project pricing for obvious competitive reasons. However, what we have to be aware of is that we think there's a couple of drivers taking place.

As I mentioned earlier, the smaller competitors especially who have been hit harder with the absence of a flu season are trying to improve their businesses as much as possible. So we are behaving as though they will likely continue to do that for some period of time here.

The second element is that we don't know yet if that is going to wind its way to the upper price point in the product line. We think that the best competitive position that we have there is our Assist merchandising program which is getting disproportionately favorable results for those customers and us who use the program compared to those who are very price oriented.

I think one of the risks -- and this is more of an opinion than fact, but I've heard it from an awful lot of our customers is remember, funeral directors went into that profession to be caregivers, not to sell things. They don't like selling things but they have to to make a profit.

And in this case where the entire nation is really struggling, it's on everyone's mind and certainly in their discussions; a number of funeral home operators have expressed to me some concern that this can become a self-fulfilling prophecy to some degree; as everyone struggles with the economy that the natural assumption of the funeral director is that the family really wants to buy down. So a lot of funeral homes are really working on training with their funeral directors and helping them make sure they provide the products that families want without assuming that everyone wants to go to the lowest price point.

Ken, could you remind us what the economics are for the independent funeral home operators on the Assist merchandising? And if my memory serves me correctly, the penetration is still relatively low here.

It is still relatively low and probably -- we probably did not -- I'm certain we didn't gain the kind of ground in the last couple of months that we expected partly because we have had to turn the attention of our sales and marketing organizations from as much time on merchandising as we would like to dealing with -- I will refer to them as competitive brush fires, if you will -- in different locales.

We're making progress with -- much more progress with the larger customers, not the national markets specifically, but those independent customers that have multiple arrangers. They seem to respond very (inaudible).

The results -- and I don't think that we've put forth any numbers. But we are somewhere -- let's appropriately divulge here. Let's say that the average selling price with a customer that uses the Assist program compared to one that doesn't is probably in the high teens to much more in terms of the average -- average selling price of the product that they buy. Does that make sense to you?

It does. It's very helpful. Last question here. On the investment income line, any other write-downs that we might be expecting here in the near term?

I ask Cindy that question all the time. I'll let her answer.

Clint, I don't think so. The one wildcard are these private partnership that we got as part of the spin. There's probably, I don't know, eight to nine partnerships that are part of that that the book right now is 16, $17 million.

I think the write-downs we just had -- obviously those were very large. It was $4.5 million in the quarter. Certainly the biggest thing we've seen in these funds to date, it's hard to imagine that they would go down that much more the next quarter. But I suppose there's a lot of things that have been difficult for us to understand in this economy.

That's tougher for us to call. In terms of everything else that we have, our other assets or other investments, there's nothing that I would be worried about.

So, excluding any potential write-downs, maybe a $3.5 million run rate would be reasonable given the forethought note (multiple speakers) and what we had in the current quarter?

That's right.

(Operator Instructions) Jack Ripsteen, Potrero Capital Research.

I had a follow-up on the competition question. Do you guys think you are gaining market share? I know volumes were down and sounds like suffered some of your competitors might be pricing throwing pricing to the wind to pick up some available market share that's out there. What do you think your data is telling you in terms of market share? And then I have a follow-up question on the investments, if I could.

One of the reasons we don't talk about market share is there's no reliable data source in our industry. You have to triangulate lots of different items, some of which are anecdote.

Here is I think the important thing for me to tell you because I don't like to get into a discussion of share because it can bounce around if you just look at the math quarter to quarter.

I will tell you this, that in these lower price points where the competitors have been out with very aggressive pricing, there are times where some customers have ordered their product instead of ours for that particular funeral. So one would say that that is a share loss in the sense that we missed that sale.

What's for us most important is that we are approaching our business as though we either have or are at risk of losing some share in these price points and we are comporting ourselves accordingly. I think that's the big thing -- what do we do rather than try to parse the math on what number exists in what segment.

Okay and then generally the health of these competitors, since some of it is hard to gather data on, is it the kind of thing where you are dealing with some caged animals, to put it in maybe an inappropriate metaphor, but is that what we are looking at?

Yes, I would say that's not an inappropriate metaphor. They're all I think good people trying to make their business survive and over time, the pressures of a declining market have been significant certainly on those without scale and scope. They have been stable for the past few years.

We're getting some signals right now that that is hitting some of those distributors especially hard. Remember, they face all the same pressures that everyone else faces of operating a business and when there's no flu season, it hits them especially hard.

So, they rely heavily on relationships with funeral homes. They generally don't offer all the other services that we do, although some do. I want to emphasize that they're generally honest business people, many of whom have been around for a very long time. They're just trying to stay afloat in a difficult time.

No, I wasn't trying to imply anything about that, that more of a victim of circumstance (multiple speakers) given that you've got a tough environment where capital is scarce and of you run into a few tough spots and you don't have the availability of the capital markets, that can be difficult (multiple speakers) a sense of that.

If you just think about the model and you have a small distributorship and you have a business that is somewhat seasonal, the flu season in ours, and you need to build inventory for that because you don't have a high velocity manufacturing or distribution system; you either have to use your own cash, borrow the money or get credit from the supplier to make things work. And whatever those pressures were in past years, one would have to expect that they are multiplied in a year like this.

Right, and then on the investments, it sounded like these investments -- obviously they're all legacy. Is there any risk of having to put more money into them or can you just let them fail i.e. are you on the hook for some capital call or something to that effect?

Yes, we are on the hook with those private equity investments for potentially more capital call in the range of 3 to $4 million.

Total over the life of the investments?

Total, exactly.

So at worst case, you would throw in another $3 million after some of these?

3 to 4, somewhere in there. I don't have the exact figure. But yes, that's the ballpark.

Stephen O'Neill, Hilliard Lyons.

Cindy, I wonder if you could indicate what -- you mentioned cost savings of $4.8 million and I wondered is that in addition to the $1.4 million of productivity gains or does that include that?

That includes that. The other amounts, really we have a couple of things that went on this quarter that were favorable.

One is our healthcare costs were lower and as you know, those very by [business]. But that was probably a couple of million. And then another million or so for our workers compensation adjustment and again, that happened to be favorable this time. We typically adjust that on an annual basis.

What was the after-tax impact of the investment loss in the partnerships?

Well the before-tax impact was $5 million, so after-tax at 35%.

Oh, I thought it was $4.5 million (multiple speakers) so apply a 35% tax rate to that?

Yes.

Finally, can you update us on steel contracts? I had a note last time that there you negotiated some more favorable terms and would those occur in the second half or can you just give us an update on those?

Yes, Steve, we have been in negotiations and of the majors, we have one contract signed at this point that we like the rate and the duration and so on. And another, we are kind of letting that float and part of it is the market has some volatility there. We think that there may be some opportunity for us to not nail all of that down right now. Generally, we will start to see the effects of both that -- the latter, the spot purchasing if you will, and the agreement in Q3.

(Operator Instructions) At this time, there does not appear to be any further questions. I'd like to turn the call back over to Mr. Mark Lanning.

Again, we would like to thank everyone for joining us on our call this morning. We look forward to further conversations in the future and if you have follow-up questions today, please don't hesitate to give us a call. Thank you much.

That concludes today's conference. Thank you for your participation.