Hillenbrand Inc (HI) 2009 Q4 法說會逐字稿

Good morning, everyone and welcome to Hillenbrand's earnings call for the fourth quarter of 2009. Today's conference is being recorded and will be available for replay through midnight Eastern time Wednesday, December 9, 2009. Domestically at 888-203-1112 and internationally at 719-457-0820. For the replay. callers will need to use the confirmation code of 8439251. If you're unable to listen to the live audio webcast, it will be archived at www.hillenbraninc..com through November 24 of 2010. If you ask a question today, it will be included for 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. Mr. Lanning, please go ahead.

Thank you, Anthony, and good morning, everyone. Welcome to our earnings call which will include results from both the fourth quarter and the full 2009 fiscal year. With me today are Hillenbrand President and Chief Executive Officer, Ken Camp, Batesville Casket President and Chief Operating Officer, Joe Raver and Hillenbrand Chief Financial Officer, Cindy Lucchese. During the course of today's conference call and the question-and-answer session that follows, we may make projections or other forward-looking statements that are subject to the Safe Harbor Provisions of the securities laws regarding future events or the financial performance of the Company. We caution you that these statements are only our view of the future and that actual results may differ materially. We also alert you to the 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 obligation to update or correct any forward-looking statements. Now let me provide some information regarding our call. We have scheduled an hour and will start with prepared remarks that should last approximately 30 minutes. We will then move directly to Q&A. If you have follow-up questions after the call has ended, please don't hesitate to call me at 812-934-7256, or e-mail me at mrlanning@hillenbrand.com. Now it is my pleasure to turn the call over to Ken Camp, Hillenbrand's President and CEO. Ken?

Thanks, Mark. Good morning, everyone. We appreciate you joining us during a busy holiday week. During today's call, I'll start with a brief overview of our performance for the fourth quarter and the fiscal year, both of which ended September 30. Then I'll turn the call over to Joe Raver to discuss the current state of the funeral services industry and Batesville Casket's strategic initiatives. Cindy Lucchese will then provide details about our quarterly and annual financial results, and she will also walk you through our fiscal 2010 guidance which was announced in our press release this morning. After the prepared portion of this call, we will be available to take your questions.

As you can see by our press release this morning, our fourth quarter net revenue declined 3.6% compared with the fourth quarter of 2008. Annually, net revenue declined 4.3% versus last year. And even though we were pleased with our strong recovery from the effects that we saw in the second quarter -- effects of the economy that we saw in the second quarter, we are not satisfied with having a year-over-year decline in revenue.

Although ours is a typically very stable industry, even funeral service felt some effect of the economy's woes in 2009. The convergence of a mild flu season, a remarkably unstable and frankly, fear inducing recessionary economy and a resulting spike in cremations, which yielded more than 80,000 fewer burials in 2009, made this one of the industry's most challenging years on record. Fortunately, we had contingency plans on the shelf which we used to respond quickly and decisively to competitive actions. As a result, we feel that we not only weathered the storm this year, but are well positioned to capitalize on our strengths in the year ahead.

Fortunately, Batesville's deep competency and continuous improvement and lean business, coupled with somewhat favorable rates for the purchase of fuel and some raw materials, helped us increase gross profit margin percentages for the quarter by 170 basis points and for the year, by a total of 90 basis points. As a result of these items and some other favorable factors such as lower spending on separation costs, earnings per share increased 19.4% for the quarter, going from $0.31 to $0.37. For the year, earnings per share increased 11.4% from $1.49 in 2008 to $1.66 in 2009. Perhaps even more important, we maintained a strong cash flow, posting $38.3 million in operating cash flow for the fourth quarter. Year-over-year, we increased cash flow 21%, ending at $123.2 million for the year. We also used a portion of our cash to pay a quarterly dividend of $0.185 per share in September, reflecting an annual dividend rate of $0.74 per share. Now I'll turn the discussion over to Joe Raver.

Thanks, Ken, and good morning, everyone. I'd like to begin by briefly recapping the past year. We began the year with relative stability and results were in line with our expectations in the first quarter. As we entered the second quarter, the economic crisis was in full swing and consumer confidence was at historic lows. We believe this caused an industry-wide mix down in products and services as consumers looked for more economical alternatives.

Consumers' conservative approach to spending also caused a larger spike in the cremation rate than we've seen in recent years. At the same time, a mild pneumonia and influenza season was decreasing the overall mortality rate. The combination of fewer deaths and increasing cremations resulted in a lower than expected number of North American burials. As industry players scrambled for volume, competitive pressures, especially at the lower end of the product spectrum. As we mentioned in the second quarter earnings call, we believe we lost some share at that time. However, we responded quickly with programs that helped us regain ground and address changing consumer purchasing patterns in the third and fourth quarters. Our operations group also continued to find ways to improve our cost structure throughout the year without reducing the level of innovation, quality and service our customers expect.

During the second half of 2009, we began to see a more normal number of deaths. The growth in the cremation rate also began to slow, but it didn't fully return to previous levels by year end. As a result, North American burials appear to have stabilized at a lower level than we had expected when we started the year. In a similar vein, the economy has become less volatile, but consumer spending patterns remain somewhat depressed. That's been reflected in the stabilization of our product mix, but at a lower level than before the economic crisis.

So, that brings us to the start of 2010. We've begun the year with a strong focus on strategic initiatives that will continue to drive our business objectives, along with an ongoing emphasis on improving cost structure. In addition, I'd like to share highlights of two key strategic initiatives for this fiscal year. The first is to optimize our core burial business for the long term. That means we'll continue to develop and launch effective new products that meet consumer needs, such as the Life Stories medallion products that debuted at the National Funeral Directors Association convention last month. We'll also capitalize on any prudent acquisition and alliance opportunities as they become available.

Two other pieces of this initiative are familiar to you from previous calls. One is our commitment to increasing sales force effectiveness through better call management, customer segmentation and compensation alignment. We'll also continue our merchandising efforts to increase average selling price per unit and improve product mix. In 2009, we focused on moving customers up the merchandising ladder because we know that customers with fully implemented merchandising systems significantly outperform their non-merchandised peers and are more loyal to Batesville Casket Company. Implementing these systems involves a time commitment by our customers, so we were pleased to see the needle begin to move slowly but steadily among independent funeral homes in 2009. We will continue driving improvement in the adoption rate in 2010.

The second major initiative is to grow profitable revenue streams outside our core burial casket business. In 2009, sales for our options cremation business were essentially flat because even though the cremation rate was up, the overall number of deaths was down. Options also suffered more from the economic downturn than did our burial business. In 2010, we plan to grow options above market rates with new product and service offerings designed to increase the number and quality of products purchased for each cremation. We will also continue to invest in our North Star product line, providing high quality, private label caskets to distributors.

Another aspect of growing revenue outside our core is an expansion of our e-business strategy. Batesville Interactive introduced the two newest offerings in its connectivity suite at the NFDA convention in October. First we launched Obit Link which, through an alliance with legacy.com will enable our customers to have access to the largest obituary network in the nation. Second, we introduced Tribute Link which gives families and funeral homes an easy way to create online video memories of their loved ones. These two new products are an addition to Web Link, an important offering that has made us the world's largest creator and host of funeral home websites.

In summary, we feel very positive about our prospects as we head into 2010. During the downturn, we continued to invest in innovative new products and services in an effort to make our customers more successful. We expect to continue making investments to further build our already strong brand. Our sales force is focused on making the most of every sales call, and we have the best distribution and service organization in the industry. While we don't know what the future will bring in terms of economic and business challenges, we are prepared to meet these challenges head on and win in the marketplace. Now I'd like to turn the discussion over to our CFO, Cindy Lucchese. Cindy?

Thank you, Joe. I'd like to provide some additional detail and perspective behind our fourth quarter and fiscal year results. Net revenues for the quarter were $153.1 million, a decrease of $5.7 million or 3.6% from the same period in the prior year. For the year, revenues were $649.1 million, a $29 million or 4.3% decrease from fiscal year 2008. Lower burial volume was the primary reason for the decrease in revenues, driven by a lower number of deaths, increased cremation rates and price competition. These factors were offset by an increase in our average selling price, which contributed $4.4 million to revenue in the quarter and $24.5 million to revenue for the year. Our merchandising initiatives and new product launches helped improve Average Selling Prices and slowed the downward trend in product mix, especially in locations that use the Batesville Merchandising System.

We also continued to experience unfavorable fluctuations in foreign exchange rates, which reduced revenue by $700,000 in the fourth quarter and $7.7 million for the year. Improvements in our cost structure were evident in our gross margin percentage. At 42% for the quarter, it increased 170 basis points over the 40.3% we posted in the fourth quarter of 2008. In addition, we increased our annual gross profit margin percentage by 90 basis points, finishing at 42.3%. Cost of goods sold decreased by $6 million for the quarter and $22.9 million for the year. Commodity costs, most notably in carbon steel, were down for the quarter by $2.4 million, but up for the year by $1.2 million. On the other hand, we benefited from $1.7 million for the quarter and $5.9 million for the year in lower fuel costs in our distribution operations.

Lean business practices also contributed to reduced costs and our Manchester and Pinola plants were recently recognized nationally for those efforts by being named Top 20 Finalists in Industry Week's Plant of the Year competition. The Manchester facility was also named 2009 plant of the year by Assembly Magazine and the Boston Consulting Group. Operating expenses in the fourth quarter totaled $31.6 million, flat with the prior year. Now, if you exclude one-time separation costs, operating expenses increased for the quarter by $1.3 million. On an annual basis, operating expenses decreased by $11.5 million, but increased by $4 million when you exclude those separation costs. Interest expense for the quarter was down by $500,000 over the prior year and by $100,000 over the course of the full year. Outstanding borrowings on our $400 million revolver were $60 million as of September 30, and the average weighted interest rate was 0.7% for the quarter and 1.5% for the year. We also recorded $3.7 million in investment and other income for the quarter, up from $2 million in the fourth quarter of 2008. In total, we had $7.9 million in investment and other income for 2009, up $2 million from the prior year. These amounts include the full impact of earnings on our auction rate securities and notes receivable from forethought, offset by the net loss on limited partnership investments.

Our tax rate for the quarter was 37.4%, compared with 42.7% in the prior year. For fiscal year 2009, our tax rate was 36.4%, 2.8% lower than in the previous year, due to the nondeductible separation cost we incurred in fiscal 2008. Net income for the quarter was $22.6 million, an increase of 17.7% over the same period in 2008. Earnings per share totaled $0.37 per share, an increase of 19.4% versus Q4 2008. On an annual basis, net income increased 9.8% to $102.3 million, up from $93.2 million in the prior year. Earnings per share increased 11.4% to 1 point -- to $1.66 per share, versus $93.2 million or $1.49 per share in the prior year. Excluding $2.2 million in legal costs and $86,000 in separation costs for the year, net income declined $4.5 million or 4.2% from fiscal 2008 to fiscal 2009. Adjusted annual earnings per share were $1.68 for 2009, compared with $1.73 in 2008, a decrease of 2.9%. Cash flow from operations remained strong in the fourth quarter at $38.3 million and for the year at $123.2 million, up from $11 million, and $101.8 million, respectively over the prior year. The lack of significant separation costs and reduced cash payments for income taxes during the year contributed to this increase, which was partially offset by an increase in cash contributed to our defined benefit plans in 2009.

Finally, I'd like to give a little color around the guidance announced in our press release this morning. Guidance for fiscal year 2010 reflects a broader range than we've historically given investors, mostly because a number of uncertainties in the coming year make it more difficult to predict results. We've identified three major uncertainties. The first is the economy, which could improve dramatically or get worse, impacting our average selling price. Second, the cremation rate spiked in 2009 and although we've done a significant amount of analysis, we don't yet know whether this trend will continue, stabilize or moderate back to historical rates of increase. The third major uncertainty is the number of deaths in North America. There are conflicting reports about the potential severity of this pneumonia and influenza season, especially with H1N1 as another variable in the mix. Because of these multiple variables, we are forecasting revenue to be in a range from $630 million, which is 3% below 2009, to $670 million, which would be approximately 3% above. The range for earnings per share is $1.40 to $1.67, with net income projected to be between $86 million and $103 million. Excluding approximately $3 million to $5 million in estimated legal costs related to ongoing antitrust litigation, we expect 2010 earnings per share to range from $1.45 to $1.70.

Several factors are expected to have an impact on operating expenses in 2010. Increased spending includes investments in strategic initiatives aimed at growing revenue and increasing shareholder value. First, we plan to invest approximately $5 million in new growth initiatives. We view these costs as important investments in the future growth of Hillenbrand. We'll also see an increase in expenses in two key areas. First, defined benefit expenses will increase approximately $4 million due to the effects of lower discount rates. Second, we anticipate additional variable compensation expense in 2010 of approximately $8 million. Virtually all of our associates are eligible for some form of performance based variable compensation. These bonuses, which are only earned when performance objectives are achieved, can represent a significant portion of an employee's total annual comp.

The environmental challenges we faced in 2009 resulted in our associates receiving lower bonuses than in 2008. However, for 2010, we anticipate achieving our objectives and paying at our target levels. Please remember that our guidance does not include gains or losses on our limited partnership investments. In 2009, we realized a net loss of $5.4 million on these investments, bringing their carrying value to approximately $14 million. Because these investments by their nature are volatile and difficult to predict, net income could be positively or negatively impacted by gains and losses during the course of the year. Finally, our guidance does not include the financial effects of any acquisitions we may make in 2010. Now, I'll turn the call back to Ken for his concluding remarks. Ken?

Thanks, Cindy. Before I wrap up, I'd like to give everyone just a brief comment on our acquisition efforts. Our strategy continues on course as we previously and publicly outlined and because of the way a public company must handle acquisitions, I can't talk about anything specific today. However, I can tell you that we have two key areas where we're focusing our efforts. First, we continue to search for opportunities in death care. As the industry leader in burial caskets, the likelihood of receiving regulatory approval for a significant acquisition in this area is questionable in the current environment. We are, however, continuing to look very closely at other potential growth opportunities across the array of funeral service products. Outside death care, we continue to evaluate other opportunities that will increase shareholder value and help us reduce our total reliance on funeral service. The broad challenge right now for both inquisitive companies and acquisition targets is to be able to look through the trough of the current economic climate to determine what future profitability levels might be. One key point I'd like to reaffirm is that our standards remain high, and we'll continue to be patient as we search for the right company to add to the Hillenbrand portfolio.

In summary, we face some of the industry's most difficult challenges in 2009. While revenues didn't progress at the rate we hoped, we responded effectively to changing market conditions. We maintain our strong cash flow, and we continue to provide our customers with the innovation, quality and service they expect from Hillenbrand and Batesville Casket. This relative stability helps us look ahead to fiscal 2010 with some optimism. We're not sure how long an economic recovery might take, but we feel confident that our company has the scope, scale and talent to continue to deliver high levels of shareholder value. We appreciate you joining us on the call today, now Joe, Cindy, Mark and I will be glad to take questions. Operator?

Thank you. (Operator Instructions) It appears our first question comes from Clint Fendley with Davenport.

Good morning, everyone. This is [Drew Peters] for Kent. Just had a couple quick questions. My first one was with regards to $5 million in growth initiatives included in guidance. I wonder if you guys could elaborate a little bit more on the specifics for those investment.

Sure, a couple things there. The vast majority of those are in our Batesville Casket business. Joe talked about those earlier. That would be our e-business initiatives, new product initiatives, et cetera. And then there's a smaller amount within that that relates to our acquisition readiness strategy.

All right, great. And Cindy, another question for you, perhaps. Looking at operating expenses year-over-year for the quarter, if we back out the separation costs, what caused the increase there and what were the moving parts in that number for the fourth quarter?

Yes, in the fourth quarter we were up a little over $1 million, I think it was $1.7 million. There's several pieces there, nothing that's significant.

Okay. And did you -- maybe I missed it, but could you provide the revenue impact from volume and mix shift during the quarter?

Absolutely. For the quarter -- do you want the quarter and the year, or just the quarter?

Just the quarter, that would be fine.

Okay. For the quarter, volume was a negative $9.4 million, and rate was $8.2 million, favorable, and then our mix was negative $3.8 million.

All right. Great. Thank you guys very much.

You're welcome.

(Operator Instructions) Our next question comes from Steve O'Neil with Hilliard Lyons.

Good morning.

Good morning, Steve.

Wonder if you could give me the DNA on the CapEx for the fourth quarter?

The depreciation and CapEx? Go ahead, if you have another question, ask it, and we'll look that up for you. We don't have that top of mind here, Steve.

Well, the other question, I was going to press you a little bit on the operating expenses because they were up something like 17%. I know they generally go up sequentially, but they were up 17% from the third quarter, was a little larger than last year and as you pointed out, the spending was above last year's level, even though revenue was down. Wonder if I could drill into that a little further.

Sure, in general, and in large part, we were up, it really wasn't a huge amount, as I said, it was about $1.7 million in Q4. The largest piece of that was incentive comp. The way that works is you look quarter-by-quarter how we are performing vis-a-vis our planned targets, and so that can move around a bit. That was really the biggest piece. There wasn't anything else that's significant in terms of quarter-versus-quarter.

Okay. Thank you.

You're welcome.

Our next question comes from Jamie Clement with Sidoti.

Good morning.

Good morning, Jamie.

Hi, Jamie.

Cindy, do you guys have an approximate CapEx range target for 2010? I'm not sure I caught that in the prepared remarks.

Yes, we do. It would be roughly in our $15 million to $20 million range.

Okay. So no real -- that's sort of your typical annual number, if I --

That is. That's just an ongoing amount that we typically spend.

Okay. And in terms of the macroeconomic and consumer picture and that sort of thing in your industry, are there any trends that you have seen sort of develop in the last three months? I mean, I know this is not the seasonally strongest period of time, but Ken, do you have any thoughts on the last couple of months specifically?

Yes, Jamie. This has been a period where our typical algorithms to predict what is taking place in the marketplace have been less reliable. And one of the big factors, as I think we mentioned on previous calls, in 2009, especially in the second quarter, which was a real -- kind of rocked our industry, certainly still a lot less than most other industries, but to us, it was a big effect, was a change -- an apparent change in the rate at which consumers selected cremation for their family decisions. And typically, cremation has gone up about 110, 120 basis points a year for a great many years, it has been highly, highly predictable. It shot up pretty significantly and as we look toward the third and fourth quarters, we're finding mixed signals in the public companies, in our data sources where typically, the signals on what cremation rates are is around a very tight band. We're now seeing spreads from some sizable sources as low as a 50 basis point change and as high as a 210 basis point change. So what that has done is it induces a chunk of uncertainties in the way we plan the business, hence the wider spread on guidance. As a rule of thumb, I'd mention to you that 100 basis point change in cremation rates is about $10 million in revenue, roughly.

Okay. And Ken, a little bit more on that. I don't know if we can sort of separate the cremation choice out of things, but have you all noticed and can you share any differences you may have noticed among your customer base between the customers that are more on board with all that your merchandising systems have to offer, versus some that just aren't quite there yet? Any trends on that front?

We've noticed a significant change. I think Joe can probably explain that more effectively than I.

Hi, Jamie, it's Joe.

Hey, Joe.

We -- during the second quarter, we were in the process of running the promotions and spending some sales force time doing that. But in the third and fourth quarters, we certainly got back on track with spending a lot of time talking about merchandising. We continue to see the number of customers who are adopting merchandising programs increase and trying to get them to higher and higher levels. From a Batesville Casket perspective, we perform much better with those customers than we do with non-merchandised customers in two ways. One is we sell more and better products to those customers, and they, in turn, sell better products to their families. And then on the second part of it, we -- they tend to remain more loyal to Batesville because we have a much more intimate business relationship with those customer,s and they tend to be our most loyal customers. Does that make sense?

Yes, absolutely. Thank you very much.

It's Cindy. I just wanted to get back to the earlier question around depreciation and amortization for the quarter. It was $4.8 million. For the year, it's $18.6 million and CapEx was $2.9 million for the quarter and $10 million for the year.

(Operator Instructions) Our next question comes from [Nara Raj] from Goldman Sachs.

My questions have been answered. Thanks.

It appears our follow-up question comes from Steve O'Neil with Hilliard Lyons.

Good morning. I forgot to ask. Were there any developments in litigation during the quarter?

Yes, Steve, this is Ken. Nothing notable. This FCA lawsuit is kind of like a tar baby. You keep trying to shake it and it keeps sticking to your hand. The plaintiff's attorneys -- and this is a plaintiffs attorney driven case, especially tenacious. We have been informed by them that they may take one of the -- one or more of the individual cases to trial, and this appears to be -- because there's not -- it would not be a class action, that pretty much seems to be wrapped up. It appears to us, and this is some level of speculation, that their purpose is to see if they can win a small case, which would have damages that would be, in the grand scheme of things, very, very tiny. But they might use that as a wedge to try to get a judge to award them money for all the legal expenses they spent in the original trial or a chunk of that. But other than that, we keep waiting for the day when this is done and when it is, we will sure tell you.

Okay. And lastly, I guess I just have to ask about selling caskets through Wal-Mart.

Yes. Well, I guess a couple -- someone is, and it's not us. We just -- the heart of this entire antitrust plaintiffs case was that we refused to sell other than through our more than 100-year-old channel. We fought that for all the right reasons, and there was a simple reason. We believe and still believe that most people do not want to go to multiple sources or go online and wait four or five or six days to get a casket when a death occurs. We believe that was reinforced by the fact that Costco's success over five years appears to have been minimal. Now, I'll say on the other side, Wal-Mart has a powerful franchise in America, and it remains to be seen what happens there. So we are not taking it lightly. We're watching it very, very closely and in fact, seeing what their service levels are, and their performance is and how consumers respond. It appears, based on their statements, that this is a beta test. They've described it as a beta, and it's online only that they have indicated, to the best of our knowledge, that they are not and perhaps do not intend to put them in their stores.

Okay. Thank you.

Sure.

It appears we have no further questions in the queue at this time. I would like to turn the conference back over to Mr. Lanning for any additional or closing remarks.

We appreciate everyone joining us for the call this morning and if you have further questions, please don't hesitate to call us, and we look forward to meeting many of you over the next few months. And hope everyone has a very happy and healthy and safe travels for the Thanksgiving holiday. Thank you very much. Bye.

That does conclude today's conference. Thank you for your participation.