Hillenbrand Inc (HI) 2010 Q4 法說會逐字稿

Good morning, everyone, and welcome to the Hillenbrand earnings conference call for the fourth quarter and fiscal year 2010. A replay of the call will be available until midnight Eastern time Tuesday, December 7, 2010 by dialing 1-888-203-1112 in the United States, or 1-719-457-0820 internationally, and using the replay pass code of 4359808. If you are unable to listen to the live webcast it will be archived at www.HillenbrandInc.com through November 23, 2011.

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 this text or audio is not permitted without Hillenbrand's written consent. Now at this time it's my pleasure to turn the conference over to Mark Lanning, Treasurer and Vice President of Investor Relations. Mr. Lanning, please go ahead.

Thank you, Michelle, and good morning, everyone. Welcome to our earnings call for the fourth quarter and fiscal year 2010 which ended September 30. On the call today are Hillenbrand President and Chief Executive Officer Ken Camp; Batesville Casket President Joe Raver; and Hillenbrand Chief Financial Officer Cindy Lucchese. For the Q&A session at the end of the call, we will be joined Lukas Guenthardt, Senior VP of K-Tron Corporate Development.

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 will start with prepared remarks from Ken, Joe and Cindy 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?

Good morning, everyone, and thank you for joining us during this busy holiday week, a time when we all have much to be thankful for.

I'm sure you saw our press release early this morning, which is also posted on our website. Our results for the fourth quarter and for the full fiscal year were solid, particularly given an economy that remains sluggish with inconsistent signs of recovery. We posted respectable increases in earnings per share for both the quarter and the year when we exclude costs related to the K-Tron acquisition in April; legal costs for battling the antitrust litigation; and some restructuring we did around aviation assets we co-own with Hill-Rom here in Batesville.

This year provided a great deal of learning for us at Hillenbrand. On the Batesville side, the management team has found new ways to create future revenue streams, maintain gross profit rates and continue generating strong cash flows, all in the face of a soft burial market and high competitive pressures.

This was also the year when we made our first major acquisition as a stand-alone public company. We were very pleased with the diligence, professionalism and speed at which the Hillenbrand and K-Tron teams handle the transaction. We are even more pleased with the result and consider this significant acquisition and transition to be a solid success with even greater promise for the future.

So to recap the past quarter and fiscal year, I'll start with a brief overview of the K-Tron business. K-Tron's post-acquisition transition continues smoothly with leadership completing the strategy management process in September. The plans include goals to build lean capabilities that will drive efficiencies in 2011 and beyond. Even though it's still early in the process during my visits to the K-Tron facilities, I've have already seen evidence that their organization is embracing lean principles as a way to eliminate waste and its attendant costs.

The K-Tron team was also introduced to the leadership talent review process in September. This helps us identify key roles and develop succession plans. This process has already borne fruit with our announcement last Friday that Lukas Guenthardt will take up duties as President of the Size Reduction Group January 1, succeeding retiring president, Don Melchiorre. I want to thank Don for 28 years of leadership service to K-Tron and for remaining at the helm of the Size Reduction Group throughout the acquisition and transition. His leadership and experience have been invaluable.

And I want to provide congratulations to Lukas who brings deep industry experience and enthusiasm for the business that will help the Size Reduction Group continue to expand on its historic successes.

During the past two earnings calls, I have taken some time to acquaint you with the K-Tron business and the industries it serves. As we look ahead to 2011, I'll continue to give you insight into how we think about this business and the key factors we use to measure its progress.

On our last call, we reported that K-Tron had recorded their strongest sales for the year. The team has since surpassed those results, posting fourth-quarter revenue of $58 million, approximately 23% higher than a year ago. Their backlog balance has increased to $57 million.

Now as you think about backlog, please remember that approximately 40% of total K-Tron revenue currently comes from the sale of consumable parts. Because of the short cycle time to fulfill these orders, only a small percentage of them become part of the backlog calculation. You can find more detailed information about backlog in our upcoming 10-K filing.

Bookings for the Process Group are currently coming in faster than shipments are going out, which allows the group to build backlog for the coming quarters. Increasing revenue combined with increasing backlog indicates some recovery from the recession. The question on everyone's mind is, will it last?

Thus far the economic growth appears to be strongest in China, Korea and certain Asian countries with some strength in Europe and the Americas. So we are cautiously optimistic about business going forward.

In the Size Reduction Group, we've seen improvement in orders for consumable parts which is the largest part of the group's business. We expect to see that rate continue as customers ramp up equipment use to meet the modest increase in demand generated from coal, which is part of the forecast.

We are also seeing increased demand for size reduction equipment outside the US, particularly related to mining, fertilizer production and biomass energy generation. China continues to bring coal-fired energy plants online at a very rapid pace, generating added orders for original equipment.

Earlier, I mentioned that K-Tron had completed 2011 business plans and I'd like to share those with you at a high level.

Process Group's core business depends upon solving its customers bulk solid material handling problems. They are experts in solving all types of production issues, such as how much seasoning should go on a potato chip and how it's applied to minimize waste, or what the tolerances are for the active ingredients in prescription medication. One of K-Tron's distinguishing competencies -- give me a second here. We've got a real feedback loop in our system. Okay? Sorry for that.

One of K-Tron's distinguishing competencies is their unparalleled ability to predict how a wide range of unique materials will behave in the conveying and feeding process on a production line. This is something that their customers value highly.

Our engineers have put equipment into a variety of production environments from heavy volume plastic resin manufacturing plants to intricate processes producing over-the-counter drugs. This knowledge, when coupled with the superior designs of K-Tron equipment, provides real value to these customers. Originally, the Process Group was known for providing only feeders. Over time, we started selling additional third-party components such as pneumatic conveyors. The acquisition of Premier Pneumatics by K-Tron in 2006 positioned us as a single source supplier of material handling systems under one highly respected brand. An increasing number of customers want to purchase complete material handling systems from one supplier, eliminating the complications of dealing with different technologies from different suppliers.

Continuous flow processes are the Process Group's sweet spot, and there is ample opportunity to expand our presence in a number of industries. For example, much of the pharmaceutical industry has historically used batch processing. But as new drugs come online, those manufacturers are moving, albeit slowly, to continuous flow processes. This transition enables us to add measurable value and help reduce manufacturing costs while improving quality.

There is also significant potential to explain -- expand globally with integrated systems as factories retool or bring new operations online. The K-Tron brand is well known and accepted around the world as the premium name for material handling equipment in the bulk solid arena. As a result, the Process Group will seek added growth by increasing our ability to sell and service K-Tron products in high-growth economies.

The majority of the Size Reduction Group's success has historically been in North America, where our three brands, Penn Crusher, Gundlach and Jeffrey Rader, are well known in the industries we serve. We are taking steps to further expand these product lines in other geographic markets such as China, India and Russia, and we are encouraged by the positive response we've seen. As a result, we plan to establish a sales and service presence in key growth markets so we can be seen as a domestic supplier of equipment and spare parts in those foreign locations.

An emerging growth opportunity for the Size Reduction Group is the increased demand for energy generated from biomass. The Jeffrey Rader brand has established a name for itself during the past few years, mainly with installations using waste wood in Europe. This is really an extension of the Company's expertise and reputation in wood handling for the pulp and paper industry.

Although there is currently a very small market for biomass energy systems in the United States, we believe that most growth in the near future will come from European countries due partially to the existing carbon dioxide cap and trade regulation they have. We will serve the European markets through our well-established sales, engineering and service subsidiary in Stockholm; and US government decisions regarding cap and trade legislation will be a big factor in the rate of growth for biomass insulations domestically.

K-Tron has a great deal of room for growth on a global basis, and we will lay the groundwork in 2011 and report on our progress in future earnings calls. Now I'll turn the discussion over to Joe Raver, President and Chief Operating Officer of Batesville Casket. Joe?

Thanks, Ken, and good morning, everyone. In 2010, we saw a return to more stable market conditions within funeral service. We believe deaths were slightly down year over year and the cremation rate returned to a more -- more normal growth rates during the year compared to the spike we saw in 2009. The combination of lower deaths and a higher overall cremation rate resulted in a decline for burial caskets in 2010. Although death rates can vary from year to year, we plan for current trends to continue for the next several years.

As we've mentioned in previous calls, in 2009, some families reacted to the bleak economy by turning to lower-priced caskets. At the same time, many casket manufacturers and distributors were battling manufacturing overcapacity and high fixed costs. As a result, competitors applied aggressive pricing tactics in an attempt to retain volume in this extremely difficult competitive economic and demand environment. That pressure, though less severe, continued throughout 2010, driven by the still weak economy and lower demand for burial caskets.

Like many of our peer companies in the death care industry, we felt pricing, volume and mix pressures throughout the year. As a result, we posted a 1% decrease in 2010 revenue compared to the previous year. Naturally, we are disappointed in the overall numbers, although we saw some improvement in the fourth quarter with a slight increase in year-over-year revenue.

In the past, you heard Ken talk about being a company that does well by being -- I'm sorry -- that does well by doing good. And that's one of the visions that drives our strategic initiatives. We believe we can increase our own success by providing products and services that improve the quality of funerals for families and that improve the profitability of our funeral home customers. One way we do this is by creating new products that help funeral directors provide more meaningful experiences for grieving families.

Just before the National Funeral Directors Association convention in October, we introduced new products that capitalized on the success of our LifeStories Medallion and LifeView Panel caskets. We expanded these personalization platforms with new models at both higher and lower price points in our burial line, and have introduced them into several of our cremation caskets as well.

We can also help funeral homes improve their profitability by providing them with value added services. One of our most noticeable efforts in 2010 was the expansion of our Batesville interactive connectivity suite. An online presence isn't just a luxury for most businesses today; it's a necessity. Many funeral homes don't have the dedicated resources to create and maintain a website that will tell a compelling story to families looking for funeral services. So we can help funeral homes create websites that do just that, and then provide opportunities for additional online revenue streams, such as electronic obituaries and digital video tributes.

Earlier this month, we announced an exclusive strategic agreement with FTD that allows our Web-link customers to offer cobranded floral products online. Website links connect visitors directly to a local FTD florist Sympathy Collection. The consumer has access to convenient, high-quality arrangements while the funeral home and the local florist both increase their visibility and profitability.

Another way we drive our results is by relying on our expertise in lean business practices to constantly improve our cost structure. We leverage these processes to carry lower inventory per sales dollars than do our competitors, and at the same time, we strive to achieve on-time delivery more than 99% of the time.

As we look ahead to 2011, we'll continue to build on these successful strategic initiatives. Given the scale and scope of our offering, we are well-positioned to anticipate and respond to changes in funeral service. We'll continue to focus on our core business, the sale of burial caskets and cremation products to licensed funeral directors operating licensed funeral homes.

We also plan to use the power of our brand to reinforce our position as an industry leader and expand our presence in the marketplace.

We've already seen that families respond really well to the opportunity to personalize the funeral experience, so we will continue to differentiate ourselves by providing new products and services that offer a wide array of choices at various price points.

We also noted that our sales force is a key to our success, and we'll build their expertise in merchandising, give them tools that improve the effectiveness of their sales calls, and compensate them in a way that drives growth and profitability.

Finally, we'll continue to develop non-burial revenue streams by investing in areas of the industry that have strong potential, such as Batesville interactive and the Options cremation business.

Along this same vein, many of you are aware that earlier this year, we've purchased the intellectual property of a company that designed poly resin burial vaults. We are excited about the potential for this technology and have spent the past six months or so developing a product and service offering we think our customers will like. We're currently beta testing this strong, lightweight vault with a small group of customers in the Midwest, and we'll use the information we get from the test to refine our offering and better understand the viability of this nascent business. This is a new product in a mature niche who are taking the time to make sure it's the right fit for long-term success.

Batesville has the strongest brand in the industry, built on a reputation for high-quality products, capable sales and service, and a world-class supply chain. In 2011 we will continue to extend the reach of our brand to improve the quality of funerals, generate additional profitability for our customers and, in the process, drive our own growth.

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

Thank you, Joe. The acquisition of K-Tron in April of this year impacted our fiscal 2010 results in a number of ways. We spent a little more than $10 million to find and acquire K-Tron. Acquisition accounting added nearly $19 million of expense with about $13 million resulting from the one-time impact of step-up for inventory as well as backlog. These step-ups depressed K-Tron's gross margin as the average percentage for the six-month period of April through September of 2010 was 33%, well below the typical gross margin range for K-Tron of 40+%.

The remaining roughly $6 million of acquisition accounting impact represented six months of expense related to the amortization of intangibles resulting from acquisition accounting and increased depreciation expense due to step-ups for fixed assets. Additionally, interest expense on the debt used to finance the purchase was slightly over $3 million. At the same time, K-Tron added $109 million to 2010 revenue.

Now turning to our specific results, net revenue for the quarter was $212 million, a 38% increase over the same period in the prior year. Let's start with Batesville Casket sales, which were $154 million, up 0.5% or roughly $1 million over the same period in 2009. For the year, Batesville's revenue was $640 million, down just over 1% or nearly $9 million. Lower burial unit volume continues to be the primary reason for the decrease in annual revenue, driven by fewer deaths and an increase in cremation year over year.

While average selling price decreased in the fourth quarter, there was a modest increase for the year that contributed $1 million to revenue. We believe that Batesville's merchandising initiative and new product launches helped improve average selling prices and slowed the downward trend in product mix.

We also experienced the favorable impact of currency fluctuations, increasing revenue for the quarter by about $0.5 million and for the year by $5 million.

K-Tron posted revenue of $58 million for the quarter, a nearly 23% increase over 2009 and $109 million for the six months they did part of the Hillenbrand, a 12% increase over the same period in 2009. Keep in mind that our quarter period and accounting basis don't align precisely for comparison purposes.

At approximately 42%, Hillenbrand's gross profit margin percentage remained steady year over year for both the quarter and fiscal year. At Batesville, gross profit margin decreased 60 basis points to just over 41% for the quarter, but increased 110 basis points for the year, exceeding 43%. This was driven mostly by lower commodity costs and supply chain cost efficiencies.

Although full-year commodity prices have been favorable overall, Batesville has recently been paying more for commodities and fuel compared to the level at September 30, 2009.

K-Tron's fourth-quarter quarter gross profit margins rose 90 basis points to nearly 43% but with only 33% for the six months it has been part of Hillenbrand, compared to 42% in the same period in 2009. Now as I noted earlier, this is primarily the result of the one-time impact of step-ups for inventory and backlog. Excluding this impact, K-Tron's gross profit margin would have been 43% for the six-month period.

Operating expense for the fourth quarter was $54 million compared with $32 million in the same period in 2009. The $22 million increase is largely due to the addition of K-Tron. Their operating expense in the quarter was about $16 million, which included nearly $3 million related to the amortization of intangibles resulting from acquisition accounting.

In addition, antitrust litigation expense was $3 million higher than Q4 2009 due to recent activity in the case.

We also recorded a $3 million charge relating to the restructuring of our airport operation. We have a joint agreement with Hill-Rom and have worked together to optimize the use of aircraft. We have agreed to dispose of two of the four jointly owned aircraft which resulted in writing down the book value of the plane to be sold to fair value. This will reduce future operating costs by an estimated $1 million per year.

For the year, our operating expense was $175 million, an increase of $56 million or 47% over last year. About $44 million of this increase is due to K-Tron. Now $33 million is related to K-Tron's operating expense, including $5.6 million for amortization of intangibles resulting from acquisition accounting, and $10.5 million related to acquisition costs.

Of the remaining $12 million increase in operating expense, about half relates to incentive compensation due to 2010 results being more in line with target than in 2009.

Interest expense for the quarter and for the year increased by $2 million compared to 2009 due to borrowings on our revolving credit facility and the issuance of our 10-year senior notes, both related to the K-Tron acquisition. As of September 30, we had outstanding borrowings of $255 million on our $400 million revolving line of credit, along with $150 million of outstanding 10-year senior notes.

In the past year we focused on better optimizing our long-term capital structure as we determined the best method to finance the K-Tron acquisition. As a result, we decided to take advantage of historic low interest rates by issuing 10-year public bonds at a coupon rate of 5.5%. Although this increased our debt service costs in excess of the rate we pay on our revolving credit facility, we felt it was prudent to add committed, longer-term financing to our debt structure, as well as to take advantage of historically low long-term interest rates.

For the year, the 37% tax rate reflected an increase of just over 0.5%, mostly related to non-deductible business acquisition costs.

To summarize the previous numbers, net income for the quarter was $20 million, an 11% decrease from the prior year. Earnings per share for the quarter decreased 14% from $0.37 per share to $0.32. Excluding antitrust-related legal costs, business acquisition costs and airport restructuring, offset by favorable sales tax recovery, EPS increased 8% to $0.40 per share compared with last year.

For the year, net income and EPS each decreased 10% to $92 million and $1.49, respectively. On an adjusted basis for the earlier mentioned factors, plus non-recurring acquisition accounting effects, annual net income was $112 million, and EPS was $1.80, an increase of 7% over 2009 adjusted results.

Cash flow from operations for the quarter dropped $37 million over the prior year, but this was due almost exclusively to the timing of income tax payments in the fourth quarter. For the year, cash flow was $118 million, only a 4% decrease from the prior year, due to the costs related to business acquisition as well as [spending of] deferred compensation and the aforementioned higher tax payment.

These were partially offset by a decrease in defined benefit plan contributions and receipt of our first interest payment on the outstanding forethought notes receivable.

Now turning to guidance, it's important to consider the effects of K-Tron as well as one-time impacts from 2010.

Let's start with the K-Tron acquisition. The transition from a single operating company with one line of business to a holding company with more diverse business lines naturally will affect financial results. This impact will include one-time costs to identify and acquire the new business, acquisition accounting, including amortization and interest, when debt is used to finance the transaction. Of course, the expectation is that these items will be more than offset by the future stream of earnings and cash generated by the new business.

In 2010, we spent $10.5 million to find and complete our acquisition of K-Tron international and experienced more than $13 million of acquisition accounting relating to the step-up of inventory and backlog. Neither of these expenses will occur in future years.

However, there is an ongoing effect from acquisition -- accounting that will impact future years. We expect that to be about $11 million in 2011, continuing at this rate for several years.

Further, we borrowed money to finance the acquisition which increased interest expense in 2010 by about $3 million. Take into account a full year of financing, we expect interest expense of about $13 million in 2011.

Outside the K-Tron acquisition we had a few other items in 2010 that will not recur, including the $5 million over-remittance of sales tax and $3 million of income relating to our $15 million in Limited Partnership investments in 2010. It's impossible to predict what, if any, income or loss will result from these investments this year.

Finally, the negative impact of $3 million airport restructuring and a $3 million options securities write-down will not recur.

Turning to guidance for fiscal year 2011, we expect revenue to range from $855 million to $875 million, an increase of 14% to 17% over 2010. Revenue at Batesville Casket is expected to modestly increase as a result of higher average selling prices and new strategic initiatives, partially offset by continuing softness in burial casket demand.

In the K-Tron segment, the Company expects a double-digit increase in year-over-year revenue as the economy strengthens.

Now although we don't give guidance on gross margin, we wanted to provide some insight regarding our expectations for 2011. Because K-Tron establishes customer pricing on an order by order basis, they include current cost of materials and components in their bid. As a result they are able to maintain fairly predictable margin levels on a product by product basis.

However, product mix does have an impact on their margin. In general, replacement parts carry a higher gross margin percentage than equipment. Thus, as the economy strengthens and equipment orders increase and become a larger mix of sales, margin percentages will decline as total margin dollars increase. We expect gross margin percentages to return to more historic levels.

Now in contrast, Batesville Casket sets prices once per year and is therefore more affected by volatility in the cost of materials throughout the year. We anticipate commodity price increases, particularly in the areas of steel, res. metals and textiles.

As you know, Batesville uses approximately 80 million to 90 million pounds of steel and 3.5 million gallons of fuel per year, so costs in these areas will have a bigger impact depending on volatility.

GAAP EPS for 2011 is expected to be from $1.70 to $1.82, an increase of 18% to 22% over 2010. The increase is largely driven by the elimination of non-recurring expenses in 2010 related to the K-Tron acquisition.

Adjusted EPS for 2011, which excludes an estimated $3 million of antitrust litigation expense, is expected to be from $1.79 to $1.85, compared to $1.80 in 2010. The additional growth in operating income generated by a full year of K-Tron results will be offset in part by a full year of interest expense and amortization of intangible assets.

EPS for 2011 will also be affected by $6 million in investments and strategic growth initiatives related to both Batesville and K-Tron. These initiatives are not anticipated to drive significant revenue growth this year, but we do anticipate revenue growth from these initiatives beyond 2011.

Our effective tax rate for 2011 is expected to range from 33.5% to 34.5%, a decline of 250 to 350 basis points from 2010, due to a higher domestic manufacturing deduction, non-deductible acquisition costs in 2010, and K-Tron's lower tax rate resulting from a higher percentage of foreign income.

Capital expenditures in 2011 are expected to range from $22 million to $26 million, an increase of $6 million to $10 million over the prior year. This is due to the inclusion of K-Tron in 2011 as well as additional investments in growth and infrastructure initiatives for both Batesville and K-Tron. Now I'll turn the call back to Ken for his concluding remarks. Ken?

Thank you, Cindy. To sum up, 2010 was an exciting and we think a very solid year for us. Batesville made investments in potential new approaches to generating revenue in the death care products industry; we look forward to telling you more about that as the year unfolds. And we made a substantial acquisition in the form of K-Tron International, which is performing better with each quarter and which offers significant future growth potential.

In 2011, we will continue to focus on building a strong diversified organization that supports growth-oriented operating companies to drive accelerated increases in shareholder value.

Before we turn to the question segment, I'd like to let you know that Lukas Guenthardt from K-Tron is available with us on the call today, and he will be helping Joe, Cindy, Mark and me answer your questions. Operator?

(Operator Instructions). Clint Fendley, Davenport.

Good morning, guys. Thank you also for the detail on K-Tron in the release. That's very helpful.

I guess could we begin with, maybe you guys providing a bit more color on the $6 million in investments and growth initiatives, exactly what you guys will be doing there on both the K-Tron and Batesville side?

On the Batesville side, we have -- as you know we have been investing in our Batesville interactive connectivity suite, and we'll continue to invest in that business and expect that business to continue to show nice growth rates in the coming years.

The other major place which we mentioned this time in the call was in the vault business. And as we are gearing up to figure that business out and see if it's a viable business for us, we are making some investments both in personnel and some capital equipment there as we roll that beta test out across the country a little bit more broadly.

And Lukas will answer --

Yes, this is Lukas, Clint. At K-Tron, we are investing mostly in people, and when we say people it's additional sales people mostly outside of the United States; some business development people to grow our business on a more global basis.

We're opening an office in China for the Size Reduction Group to have more of a presence there. And we are investing some money into new product development. Those are the three categories in essence of our investment.

Lukas, how should the office in China help you with securing some of the opportunity for the replacement parts there, in that country?

That's exactly -- what we are doing is we have about 204 machines in China, but we're not getting any spare parts revenue from there, because, simply, the Chinese customers can call anybody in China. That's what they need to have to sell parts there.

So the office -- the top priority will be to sell parts, to do service on the installed machine base. The second priority then is to sell new machines into China in domestic currency.

Okay, great. I guess the last question here, but as I look at our 2011 estimate that we have for you guys, I guess our revenue was sort of at the bottom of your range and our effective tax rate was a bit higher, but yet our EPS number was still a tad bit higher than the guidance that you provided this morning. I wondered if you could help me understand just -- and maybe the answer is the $6 million in growth initiatives here, but what additional expenses from a core operating perspective that you might expect in the coming year that would I guess yield a bit lower EPS guidance than we might otherwise have expected?

First I want to clarify that our GAAP EPS for 2011 is $1.70 to $1.82, as we said in the release; I wanted to make sure that was clear.

To answer your question, I think you are right, the strategic investments of $6 million are part of it. But as I mentioned during the call, really the key thing here is the interest expense and the amortization. Those are the two biggest drivers. We talked a bit about margins. While we do think there will be a little bit of depression on margins on both sides due to the reasons I cited, those will not be overly significant.

The other thing to keep in mind is we did have the sales tax receivable -- the favorable impact from the sales tax, and that was about $5 million, and that won't recur.

Okay. And then on the amortization, then, Cindy, obviously no change in 2011. When does that actually step down -- the K-Tron related amortization?

The biggest driver is customer relationships, which is about a 20-year amortization. Then there is some IT and some other -- about five years for those. so I would guess over the next five years you should think of it being roughly where it is now, in that $11 million range, and then it will drop down after that. But, again, the customer relationship is the biggest piece, and that has a 20-year life on average.

Okay, okay. Thank you, guys.

Jamie Clement, Sidoti & Company.

Good morning. Cindy, in your remarks towards the end, you talked about -- it seemed like you talked about your allowing for some degree of commodity inflation in your guidance. Is there -- can you share kind of what the upper -- what the upper kind of percentage of inflation number is beyond which we [should be] a little bit worried?

Well I guess the best way -- you can probably get lots of good data on what people think steel prices are going to be. We begin paying higher prices for steel really starting in the third quarter of the year; it was just (technical difficulty). But in the fourth quarter, on average, we were paying $0.42 a pound. And I think most people believe that steel prices will continue to go up, certainly not at the rate that you're going to see with more precious metals and some of the other commodities that have that.

Now what I will tell you, we'll of course continue our lean initiative, and that will help offset some of that.

Okay. That is very fair. Any -- and I guess I could potentially wait for the K for this, but any changes to any sort of pension assumptions; where does the pension stand now? And that was -- that did hurt your earnings this year, right?

Well, we are fortunate, unlike many other companies, even though we do get impacted by pension, it's not significant. We actually -- we made a payment of about $6 million to the pension plan. We talked about in previous Qs of needing to do another -- up to maybe $25 million or $30 million. We are still looking into that. But the actual impact itself was not huge from an expense standpoint this year.

Okay. But from a balance sheet standpoint or from a funding status standpoint, do you have the number that you were underfunded as of September 30? Or should I wait for the K?

Well, basically what we have said is -- oh pardon me. Okay, sorry.

Basically what we said in the K is what we said in the previous Qs, which is that we will be making some kind of a payment to the plan in 2011. If we go up to a full 100% funding status, it would probably be in the neighborhood of $25 million to $30 million.

That was my question. Thanks very much. You're not required to do that, right?

I'll add a point to that as we think about this. There is a lot to be played out in 2011 as we find out what happens to equity markets, which could raise the basis of the amount that's already in the pension plan. (multiple speakers) what we want to do is put money in, have the equity markets raise the value of that plan, and then have money -- excess funding there that cannot be removed. So we're going to meter this very, very closely as we go along. That's why we are giving you a big range. It could be zero addition; it could be in the $20 million (multiple speakers)

But as of September 30, the underfunded portion is in the $20 million range. Is that right?

Underfunded -- that's from where we are now to full 100%.

Yes.

Correct. Yes, yes; that was my question.

(multiple speakers) requirement to reach.

Right.

Okay, okay. Great.

I'll also point out that we don't have to make that final decision until late next summer.

Absolutely. No, I -- totally understood. Totally understood.

Changing gears to K-Tron a little bit, I don't know if -- Lukas , I don't know if this question should be directed toward you -- but can you talk a little bit more about some of the biomass trends, that end market, what you're kind of seeing there and what you expect to see over the next couple of years in general terms?

Yes, Jamie, I think I can. Like we said in the release, we see the biomass trend mostly in Europe right now. Biomass business growing in Europe, that is because there is an existing cap and trade system in place. Whether it's good or not, that's a different judgment. But they do have advantages of burning wood because it's carbon neutral, and wood -- waste wood is one of the biomass -- most biomass is waste wood in Europe anyway. So we see a trend to adding biomass to existing coal-fired power plants, 10% biomass, 90% coal, etc. just to reduce that carbon dioxide emission.

And Jeffrey Rader has always been in that business. Biomass goes back many years. As we've been in it, we've built a strong name, and it looks like a viable business for the next few years, at least in Europe.

There is some interest in the United States too, but because of the uncertainty about legislation, Congress has already decided not to regulate -- implement a cap and trade system. So now it will be EPA.

There is some uncertainty as to what the requirements will be in the US market. However, we believe -- we've had systems. We have bookings in the United States; systems have been installed. In our opinion, it's going to be a very good business to be in for next one or two decades.

Okay, great. Thank you all very much for your time, as always.

Steve O'Neil, Hilliard Lyons.

Good morning. Cindy, you mentioned the increase in revenue for Batesville Casket of about $900,000. $500,000 was a positive benefit from currency. Can you give me the breakdown or the impact of the volume and selling prices?

Absolutely I can. The breakdown -- I'll give you the quarter and the year. (multiple speakers)

For the fourth quarter.

For the fourth quarter, okay. The volume for the quarter was $1.4 million favorable. FX, as we mentioned, was $0.5 million favorable. And the average selling price was $1 million unfavorable.

Okay, great. And then you mentioned several nonrecurring items, the antitrust costs, the business acquisition costs, aircraft assets. And then you mentioned the favorable tax recovery. Can you give me the pretax impact of those non-recurring items and where they are on the P&L?

You know, Steve, I don't have that right in front of me. I can certainly do that, but it may take a minute to just pull that together. So if you want, I can -- we can work on that and get that to you later in the call here.

Okay. How about fourth-quarter D&A and CapEx?

Okay. Fourth quarter was CapEx of $6.1 million, and depreciation and amortization is $9 million.

Okay. Now you referred to the $11 million of intangible amortization that you're going to experience in 2011. But for the latter half of 2010, that was present as well, was it not?

Yes, it was. It would have been roughly half that, so $5 million to $6 million.

Okay. And then I guess -- and then I may just be wrong here; I guess I was under the impression that steel prices might have been moving lower this year. I guess has that reversed, and now you're looking for higher steel prices in 2011?

Fuel prices were moving lower in the year originally. Oh, steel, pardon me.

Steel prices were moving lower in the year. So if you look back at Q1 and Q2 we were paying a lower price for steel than we were the year before. However, as we got into the third quarter they started to -- basically it was slightly higher in terms of what we paid. And by the time we got to the fourth quarter we are paying a little bit higher -- we are paying about $0.42 a pound, as I mentioned earlier. It was roughly $0.34 a pound the year before.

Okay. And outlook in the 2007 is not for any price declines or any weakness in steel pricing?

No, no, not at all. I think the key is the bigger -- I think most people, most experts, expect steel prices to increase. But the bigger concern from a commodity standpoint is really more around precious metals, the red metals, things like that which don't impact us much if at all.

Okay, great. I can get those non-recurring numbers off-line later this morning, if that's okay, and then we can just talk about it then.

Okay. That would be perfect.

Thank you.

(Operator Instructions). Adam Hamill, Gates Capital Management.

I was just wondering if you could give us the pro forma revenue for K-Tron for the year?

The pro forma revenue for 2010?

Yes.

Okay. We had just for our -- while they were part of us, it was $109 million. And then, hang on here one second, we'll get that for you.

Then it's publicly disclosed the first (multiple speakers) which will (inaudible) to that.

There's no overlap, it's just this -- okay.

Yes; so what we will do, we'll grab those numbers here for you. But basically what you do is add the $109 to what they had in the earlier few quarters.

And going forward, what's kind of a good quarterly run rate on corporate operating expense? I think there might have been some unusual charges there this quarter.

Yes; I think that's why we were trying to be so clear in the script. If you -- what you should do is if you start with what we actually had in 2011, you'd want to make sure that you didn't include the one-time thing we talked about, which is the sales tax, the option rate security write-down, things like that. So you take all those out.

The other tricky part though is for K-Tron. Their operating expenses for the first six months were $33 million, and that did include only six months of amortization. So you'd want to take that into account. So I guess for K-Tron, $66 million plus another -- less another $6 million of amortization would give you a run rate of about $60 million.

$60 million for the full year?

Yes. If you are looking at what it ran in 2010 -- what you would -- extrapolate from 2010.

We're trying to get to 2011, the reported corporate number on a segment basis, what it will be excluding any charges. What do you think that will be in the fiscal 2011 year?

Well we don't -- we have given our guidance. We don't guide to those specific numbers, Adam. But I think if you look at all the pieces and parts we gave you, you ought to be able to come up with an estimate.

Okay. Thanks.

At this time, there are no further questions. I'd like to turn the conference back over to Mr. Mark Lanning.

I would like to thank everyone for joining us this morning. For further information you may wish to refer to our Form 10-K which will be filed later today, later this afternoon, I believe. And in the meantime, I'd like to wish everyone a happy Thanksgiving holiday weekend and safe travels for those who are traveling over the long weekend. So again, thank you, and have a good day.

And we'd like to thank everyone for their participation. That does conclude today's conference.