Hillenbrand Inc (HI) 2011 Q2 法說會逐字稿

Good morning, everyone, and welcome to Hillenbrand's earnings call for the second fiscal quarter of 2011. A replay of the call will be available until Midnight Eastern Time Thursday, May 19, 2011 by dialing 1-888-203-1112 in the United States and Canada, or 1-719-457-0820 internationally using the replay pass code of 366-0640. This webcast will be archived at www.HillenbrandInc.com through May 5, 2012.

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

Now at this time it's my pleasure to turn the conference over to Mr. Mark Lanning, Vice President of Investor Relations. Mr. Lanning, please go ahead, sir.

Thank you, Jennifer, and good morning, everyone. Welcome to our earnings call for the second quarter of our fiscal 2011, which ended March 31.

With me today on the call today are Hillenbrand President and Chief Executive Officer Ken Camp, and Hillenbrand's Chief Financial Officer, Cindy Lucchese.

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

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

Now let me provide some information regarding our call. We scheduled an hour and we'll start with prepared remarks from Ken and Cindy that should last approximately 20 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 email 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, and thank you for joining us today. I'm sure you saw our press release and 10-Q filings after the market closed yesterday. As you can tell by our results, we are successfully executing the strategy we outlined for you in previous calls.

In the second quarter, we saw a revenue gain of 35%. This is primarily the result of the-year-old K-Tron acquisition, which was the first step in our action plan to further expand the Hillenbrand revenue base as a growing diversified industrial company.

These results also reflect the progress in our organic growth initiatives with both K-Tron and Batesville posting revenue gains over the prior year. As our core engine, Batesville's steady cash flow and consistent results allow us to continue to invest in the expansion of our branded products and develop new lines of business that show promise for additional growth.

Before we talk more about the progress of these two operating companies, I want to update you on a couple of developments since our last call.

First, as we announced in February, we named Joe Raver as the President of K-Tron International and Kim Dennis as President of Batesville, both effective April 1. These assignments allow two extremely talented and experienced executives to broaden their exposure to our current businesses and to further increase the performance of our operating companies. Although Joe and Kim are not participating on the call today, you will hear more from them about their respective businesses in future calls.

We also announced April 20 that Forethought had paid us $151 million, settling a note receivable originally due in 2014. We plan to use this money combined with our existing cash reserves and significant cash generation capacity to accelerate our growth strategy. This includes continuing to look for appropriate acquisitions, primarily within the K-Tron space to enhance their strong organic growth potential.

We also plan at some time to add another growth platform when the right opportunity becomes available. As always, we will be prudent and patient, acquiring quality companies that can benefit from our proven core competencies to increase shareholder value.

Let me talk for a few minutes about K-Tron. Obviously K-Tron is currently the big story for us this year. They are growing nicely, with revenue of nearly $58 million in the second quarter, a result which is 52% higher than last year, when K-Tron was still a stand-alone company.

In addition, our backlog grew again this quarter, up 17% from Q1 of this year and the backlog in Q2 now reached $79 million which we consider a very positive indicator of K-Tron's future.

In addition to the very strong results we are seeing in K-Tron's core businesses and geographies, we are very encouraged by the early results from their growth initiatives. I'll give you a couple highlights on that.

For example, the Process Group has three major initiatives. One, they are working to leverage their engineering capabilities and the K-Tron brand to develop, sell, and install integrated systems solutions in current and new customer locations.

Second, we have increased our sales and service capabilities in China to serve their growing economy, and we have already seen sales growth as a result of those efforts. Third, our core business is seeking substantial growth in Western Europe primarily with the increase in plastics production. While the largest industry that we serve is the plastics industry, our efforts will continue to focus on increasing our business in both food and pharma, industries that we currently serve.

In the size reduction group, you may recall that more than half of our business is the continued sale of consumable parts for our install base of equipment. In this quarter, replacement part orders remained very strong. One of the size reduction team's primary initiatives is to increase our presence in China to accelerate sales of consumable parts and new equipment. They have hired staff members and are establishing a physical facility there, which will significantly enhance our ability to effectively and quickly serve this growing market.

The initiative which has advanced most rapidly has been the initial success in entering the potash market in Russia. We've established the sales operation there and we are very encouraged by the initial orders we received.

As you can tell by our results and our comments here today, we are very pleased with the performance of the K-Tron businesses and the growth in backlog that we are seeing.

Now I will give you a brief little update on the Batesville business. Our core engine continues to run smoothly, generating strong cash flows and attractive margins. Batesville's net revenue of just over $172 million was more than $2 million higher than a year ago. We are pleased with these results given that burials in the US and Canada were down slightly over the past year due to the rise in cremation rate.

The Company improved its relative market position during the most recent quarter in an industry that continues to consolidate. Batesville is best positioned to thrive in this competitive environment and as always, we will use our scope and scale to aggressively defend our market position.

Like most other industries, we have been pressured recently by substantial increases in market costs for key commodities including steel, wood, textiles, and plastics. Our layered contracts for steel and red metals do provide us with some protection, however we purchase roughly 4 million gallons of fuel per year, most of it at market prices which have continued to rise.

In addition to our normal lean business practices, we are taking actions to reduce fuel consumption and improve efficiency. While those efforts are effective, they don't completely offset the price increases we are currently seeing.

Batesville has currently three areas of focus to continue to thrive in this challenging competitive environment. The first is to provide more value to our customers in the core burial business. We do this by helping improve their profitability through our merchandising capabilities, by providing innovative new products that consumers value, and by offering our customers superior support to our broad sales and service organization.

The second area of focus is to use our lean business skills to improve our cost structure through waste elimination and by employing creativity before capital.

The third area of focus for Batesville is to provide our funeral home customers with new revenue and profit streams in the future.

As our customers become more successful, so do we. You will hear a lot more about how we are progressing when Kim Dennis joins us for upcoming calls.

Now I am going to turn the call over to Cindy Lucchese. Cindy?

Thank you, Ken. As Ken mentioned earlier, we are very pleased with our second-quarter performance. K-Tron showed a substantial increase in both the top and bottom lines over the prior year and Batesville continued to produce solid results. In short, our core operating businesses performed well.

Turning to the details, we are very pleased with our topline growth this quarter. Total revenue for the second quarter was $230 million, a 35% increase over the prior year. While this increase is largely driven by the inclusion of K-Tron and our results this quarter, both of our operating companies grew revenue year-over-year.

K-Tron's revenue was $58 million, an increase of more than 50% over the $38 million they reported separately a year ago. Batesville's revenue of $172 million grew about 1.5% over the prior year, driven by an improved relative market position and a favorable foreign currency impact. This increase was partially offset by a decline in total US and Canadian burials as well as a modest decline in the average selling price.

We posted a strong gross profit margin this quarter despite pressure from rising commodity costs. Our consolidated gross profit margin for the second quarter was 44.3%, which is slightly above our historical margin range of 42% to 44%. Although our gross profit margin declined by 100 basis points compared to prior year, remember that last year in this quarter Batesville posted a near record high gross profit margin of 45.3%.

K-Tron's gross profit margin was 46%, which is on the high end of their historical range primarily due to product mix. Batesville's gross profit margin of 43.7% declined 160 basis points, driven by higher fuel and steel prices. They experienced the highest volumes and therefore the highest quarterly gross margin in the second quarter of each year. Thus we expect margins for Batesville to follow historical trends and be lower in the second half of the year.

Total operating expenses were $54 million for the second quarter, an increase of $19 million due to the addition of K-Tron expenses into our results this quarter. Folding in K-Tron accounted for $18 million of the increase, of which $3 million relates to the amortization of acquired intangible assets.

Batesville held expenses relatively flat despite increased revenues. K-Tron improved their operating expense to sales ratio nicely as it declined to 27% this quarter compared to 34% last year, excluding business acquisition costs and incremental amortization expense.

Interest expense was $3 million in the second quarter, an increase of $2.6 million over the prior year due to the increased borrowings to fund the K-Tron acquisition. Investment income and other increased about $1 million over the prior year, primarily due to $2.9 million in current year investment gains.

Cash flow from operations was $25 million compared to nearly $53 million in the prior year. The decline was primarily due to the timing of vendor and income tax payments in 2010. This was partially offset by operating cash flow from K-Tron.

GAAP net income was $33 million, an increase of nearly $4 million or 12% over the prior year. Earnings per share was $0.53 compared to $0.47 in 2010. EBITDA was $59 million, an increase of nearly $11 million or 23% over the prior year and a 22% increase on an adjusted basis. Because K-Tron has comparatively higher operating expenses on a percentage of sales basis than Batesville due to the technical nature of their products, we don't see the same growth rates for EBITDA as we do for revenue.

Now turning to guidance, we are making one change, adjusting for the Forethought interest income given the early repayment of the note. Now, remember that the interest from Forethought is reported in investment income and other and had no impact on the operating performance of our business. This will impact our earnings per share by about $0.07 for the remainder of the year. Therefore, we reduce the high and low and of our range by this amount. Other than that adjustment, our guidance is unchanged.

While our interest income will be lower in the near term, early collection of this note significantly strengthens our balance sheet, provides substantial capital to fund our strategic growth initiatives, and eliminates collection risk.

I also want to take a moment to talk about the impact of foreign currency exchange rates. While we are leaving our original revenue guidance unchanged, remember that our guidance is in constant currency. As you know, the US dollar has weakened significantly since we set guidance back in November. While this has benefited our topline, it has only a minor impact on the bottom line because much of the gain is offset by the corresponding negative effect on expenses that we incur in those foreign currencies.

Assuming exchange rates remain near recent levels, we project that foreign currency translation will increase revenue by about 1.5% or $11 million to $13 million.

To sum it up, we are reaffirming our revenue guidance of $855 million to $875 million on a constant currency basis and have adjusted our earnings per share guidance range to reflect the early repayment of the Forethought note. Our updated GAAP earnings per share range is $1.69 to $1.75. The adjusted earnings per share range, which excludes the impact of antitrust litigation expenses, business acquisition costs, and sales tax recoveries, is $1.72 to $1.78.

We also expect our effective tax rate for the year to be around 34.5%. And while we're on the subject of taxes, we invested about $1 million this year in reorganizing our foreign business structure. This project will have many benefits but one of which will be greater tax efficiencies in foreign jurisdictions.

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

Thanks, Cindy. Our investment proposition continues to be compelling, in our view. We are building a company on our strong Batesville Casket Company and we have in the future growth capabilities that we think are significant. When you combine this with an attractive dividend, I hope that those on the call can see why we believe it's a compelling offering.

I continue to be asked how I feel about the K-Tron acquisition and I will give you the same response I gave last quarter, which with perhaps just a little more emphasis. We feel even better about K-Tron today than we did at the time of the acquisition. Their organization has worked diligently to solidify their position and now they're moving boldly into growth markets. K-Tron has a lot of runway ahead both through acquisition and organic growth and we are excited about our future.

Now we are ready to take your questions. Operator?

(Operator Instructions). Clinton Fendley, Davenport.

Thank you. Good morning, Ken, Cindy, and Mark. I wondered if we could start off and talk about the gross margin range that might be implicit in the Batesville business there. I know, Cindy, you talked about the impact obviously from commodity costs. How much are the commodity costs going to pressure you in the next two quarters?

I think the best way to think about it, Clint, first off, I did mention that this quarter is obviously the highest gross margin quarter for Batesville historically. So you should assume that the gross margin will go down simply because our volumes will be down.

As Ken mentioned, we are subject to about 4 million gallons of fuel a year and with costs going up obviously that's going to pressure those margins somewhat. But I will tell you that we continue to do everything we can to try to mitigate those costs, doing all the things that we can in our logistics area to cause the amount of fuel we use to go down. And we are making some headway but we will have pressure in the latter half of the year.

I guess just looking at my model, it would appear that maybe we will be below kind of the typical range of 42 to 44, though. Is that correct?

Clint, this is Ken. I think you should continue to think about the typical range of Batesville's gross margins as kind of the way that they have always been. The core engine's ability to generate gross margins has a lot of factors in it. You always have inflation in a business that you have to deal with. Our lean capabilities typically go a long way toward offsetting inflation within Batesville.

I think the only differential is probably fuel and steel a little bit, so in the second half, I would consider the range still intact, the typical Batesville is 42% to 44%. It occasionally goes to 45%. Occasionally we could have a quarter that's 41% depending upon volume. But I think the Company in future is going to run that way very similarly, probably the lower end of that range in the last two quarters.

Okay, that's helpful. What investment income should we expect from the remaining mostly I guess the income of affiliates? What should the run rate on that be?

Yes, the income from affiliates, what we've really got there is our LT investments, Clint, and that is something that our limited partnership investments, and that is something that comes in waves. It's something we can't predict. We have about $15 million of limited partnership investments on our books and as we get income from those, it is unpredictable. Typically the biggest wave does come about this time of the year because the limited partnerships do their true ups in the January timeframe, but that is difficult to predict.

Okay, and then I guess, Cindy, just so I understand the revenue guidance, the $11 million to $13 increase that is due to foreign currency, that is for the entire year, correct, not just the next two quarters?

That is for the entire year.

Given that, I guess how much have we seen year to date, then? I know for the Batesville business but I guess I'm wondering for K-Tron.

For K-Tron, we think it is about $3 million.

Okay, that's helpful. And let's see. I wondered what was K-Tron's backlog just on a constant currency basis in the quarter?

Well, we did not do on a constant currency basis. We have just what their backlog is. It was $79.3 million.

Okay. And then I guess last question if you guys maybe could just talk about you've got the Forethought money in -- maybe what your priorities are with regard to the use of the cash here?

Well, Clint, it's Ken. We obviously want to follow the strategy that we have at hand and which we have I think been enunciating now for about two years. So at this point, we're going to retain that cash and we continue to look for opportunities that can give us the kind of returns that we are beginning to see from K-Tron. And we will have something to -- as we typically do, when we are ready for an announcement, which means an acquisition has been signed, that's when we will say something about it.

But you should expect to see us maintain that cash level until such time as we are ready to make an announcement.

I will also say, however, that our Board continually evaluates the effective use of our cash. It's not like we are blind to other opportunities and we all know the range of possible things one can do with cash. So at each Board meeting we have that discussion to make sure that we are properly looking at the best things to do for long-term shareholder value.

So, Ken, should we interpret that to mean that you might look in areas even apart from, say, the tuck-in opportunities for the process side? You guys are open then to just another company apart from K-Tron. Is that correct?

We are. As you can imagine, most opportunities that we look at are in the K-Tron space both size reduction and process, although as we have said before, process is often the most likely just because it's such a wider range of industries.

If the right thing came available in the casket business, we would consider that. But as I've mentioned before, our market position there makes that really challenging to find something that is substantive. But we don't take that off the range of possibilities.

And then we also -- our future we believe will have another platform in it. Doing something like that takes a lot of time and you just never know when it comes available. We are open to that possibility. We have discussions with people, though I can't narrow it down any further than that.

Got it. Thanks, guys. Nice quarter.

(Operator Instructions). Jamie Clement, Sidoti & Company.

Cindy, Ken, Mark, good morning. Two questions or general topics of questions. First on the Batesville side, you would have had your full price increase pretty much across your full customer base this quarter as opposed to the December quarter, right?

Yes.

I think we generally have a pretty good idea what volumes look like, so when we look at commodity cost escalation versus the gross profit numbers that you put up, I am having a hard time trying to kind of figure out what the effect of product mix be it flat or slightly up may have kind of been during the quarter. Do you have a way of accurately tracking that?

Yes, the best way to think about it, Jamie, the volume was a positive little over $2 million. FX was another $700,000 and then average selling price, which is a combo of our price increase and our mix combined was about $0.5 million negative. So just almost flat.

Okay, all right. Am I right in assuming (multiple speakers)

Let me add one thought to that, which is not numerical. I'm not sure what happened to us all of a sudden. I did not step into a box. But it's not a numerical thing but a way to think about it also. You know that typically in a competitive consolidating industry people attempt to gain market share via price and we respond to that directly and specifically to maintain our business position.

So as you look at average selling price, you can see that a part of that is not just the mix that consumers may be purchasing at any given time, but it also represents our efforts to maintain our position.

Oh, absolutely. Ken, and actually that was actually why I was sort of asking the question was because average selling price can be down but the actual mix of your product can actually be up. You know what I'm saying? Depending on what you're facing in a given region and a given kind of product segment, etc., so I get it.

Moving on, just if I may, if you have another comment there, feel free. In terms of CapEx for K-Tron, can you talk about the next just because it's a relatively new business for you all, can you talk about the next sort of 12 to 36 months in terms of what your priorities are from a capital spending perspective for that business, not just in numerical terms, but saying, hey, here's where we want to spend our money?

Yes, first off, Jamie, just to frame it, historically they spend about $2 million to $3 million a year. We did indicate this year that the combo of Batesville and K-Tron would be in the $22 million to $26 million range. So you should think of them in kind of the $5 billion range.

We were very clear that we were going to make some investments there for K-Tron which we think are immediate and are going to help us with our strategic investments and add. But the key areas really are investments outside the US. I think we talked a lot about China as a key initiative for us.

Russia as well you mentioned in the potash market.

Russia as well. So I think that from a CapEx perspective, China is really where you would tend to see more of that. But you will see that I think continue in the future. We have another focus on Western Europe, so we are looking for opportunities there and you will probably see some CapEx there. Is there anything else you can --?

I can give you one -- another example. As we look about -- as we use our lean skills and say how can we help K-Tron be even more efficient and effective? Because their sale, the sale of their products, are engineered products in both divisions, but I will use the Process Group as one. A customer always wants some engineering component to mate our equipment to his production line. We have engineers in Switzerland. We have some in China and we have some in New Jersey.

And because their order flow is rather lumpy in terms of larger average sale, we think there are opportunities to better use the engineering capacity around the world to level load their work and be able to respond more effectively and frankly more rapidly to customers.

So we are going to put a little capital in the system that enables shared engineering across the globe. We believe this also may have some effect in -- some smoothing effect, if you will, of the effects of changing future currencies when we can do work in more than one spot in the world and transmit it instantly.

Got you. I appreciate the color, as always. Thanks very much for your time.

At this time, we have no more questions, so I would now like to turn the call back over to Mark Lanning for final comments.

Thank you, Jennifer. We would like to thank everyone for joining us on the call this morning and if you have further questions, feel free to email me or call me. And with that, we will conclude the call.

Thank you, sir. That does conclude today's conference. Thank you for your participation. You may now disconnect from the call.