Hillenbrand Inc (HI) 2012 Q3 法說會逐字稿

Good morning everyone, and welcome to Hillenbrand's earnings call for the third fiscal quarter of 2012. A replay of the call will be available until midnight Eastern time Thursday, August 16, 2012, by dialing 1-855-859-2056 toll-free in the United States and Canada, or 1-404-537-3406 internationally, and using the conference ID number 43750340. This webcast will be archived on the Company's website at www.hillenbrand.com through August 2, 2013. 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.

At this time, it is my pleasure to turn the conference over to Chris Gordon, Director of Investor Relations. Mister Gordon, please go ahead.

Thank you Ally. Good morning. Welcome to our earnings call for the third quarter of fiscal 2012 which ended on June 30.

With me on today's call are Hillenbrand President and Chief Executive Officer Ken Camp, and 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 provision 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 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've scheduled an hour and we will start with prepared remarks from Ken and Cindy that should last approximately 20 minutes. Ken will start with an overview of the business for the past quarter. Cindy will follow with financial results, and Ken will wrap up the prepared portion of the call with some closing comments. After that, we will move directly to Q&A when we will be joined by Batesville president Kim Dennis and Kim Dennis and Process Equipment Group President Joe Raver. If you have follow-up questions after the call has ended, please feel free to call me at 812-931-5001 or e-mail me at Chris.Gordon@Hillenbrand.com.

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

Thanks Chris and good morning everyone. Thank you for joining us today.

After the market closed yesterday, we released our earnings and filed the 10-Q, and both documents are available for your review on our website. As you saw, we were able to achieve double-digit revenue growth over the third quarter last year and delivered $0.37 per share in adjusted earnings. Once again, our results were strengthened significantly as a result of our acquisition strategy and the growth of those acquisitions as we continue to diverse our holdings into various growth industries.

The Process Equipment Group continues its strong performance, contributing nearly 70 -- I'm sorry, 40% of total enterprise revenue and over a third of our total EBITDA. This has led to consolidated revenue growth of 13% to $238 million for the quarter. Our diversification strategy continues to expand geographic reach with 17% of our revenue now coming from outside the United States.

As most of you know, we manage the business for predictable and sustainable cash flow. And despite the headwinds in burials the funeral products industry is experiencing, consolidated cash flow from operations remains strong at $50 million for the quarter, an increase of 17% over the prior year when we exclude the one-time effect last year of the forethought note repayment. As you can see, we continue to achieve positive results from the execution of our strategy even in the midst of a volatile global economy.

I'll begin with a couple of thoughts on the performance of the platforms and start with an overview of the Process Equipment Group. This platform has grown revenue 53% over the prior year to $93 million, and while a significant amount of this increase came from the addition of Rotex, the Process Equipment Group grew approximately 5% organically compared to the prior year.

The Process Equipment Group's consolidated order backlog grew 3% sequentially to $140 million during the quarter. This backlog continues to represent approximately 1/3 of the platform's annual revenue and gives us some good visibility through the rest of the fiscal year and somewhat beyond. This visibility is beginning to expose a degree of uncertainty as global markets have demonstrated some softness for a little while now, and the US energy sector continues to evolve.

I don't think it will surprise any of you that there is an increased perception of risk in the European markets and the Asian economy dominated by China has slowed its growth over the past few quarters. For China, this means their economy grew at an annual rate of 8%, down from a 9% rate last quarter, and they have historically grown at about 10%.

Additionally, we have seen some impact related to the US energy market changes. Due to almost historical lows in natural gas prices and increased regulatory pressure on coal-fired electric generation, there is reduce demand for coal, a condition which affects our mining customers. And as we said before, one of the core elements of Hillenbrand's growth through acquisition strategy is to acquire successful companies with great brands that can benefit from our core competencies of strategy management, lean business and intentional talent development. When we acquired the companies which now form the Process Equipment Group, our goal was to accelerate their growth. And a big part of that plan for organic growth in these companies is to expand into new markets with both existing and new products.

When we have leveraged our strategy management process to take advantage of some operational synergies between these operating companies. An example of this is Rotex and Terrasource, and I'll explain that name in the moment., working together to expand their geographic reach by jointly entering Russia to serve a number of key customer segments there.

Now let me tell you a little bit about Terrasource, which I just mentioned. As we've discussed in past calls, the Process Equipment Group has been diligently working on their transformation plan to consolidate the operations of what was previously referred to as the Size Reduction Group into a single organization managing our three well-known brands. For those who may be new to the call, those brands are Pennsylvania Crusher, Gundlach, and Jeffrey Rader. And this plan has included a new management structure, realignment of their production facilities and the consolidation of some elements of their previous manufacturing base.

An important part of aligning these operations was choosing a name to unite the brands in the eye of our customers. There was also the nagging issue of some Internet searches related to size reduction leading to certain weight-loss companies in shrinkwrap and other things, and I think a lot of people just didn't have a clear vision of what the size reduction group meant. It probably even confused us a little bit from time to time.

So to complete the process, we've chosen to rename the Size Reduction Group Terrasource Global. And we'll refer to it as such from this point forward. And Terrasource will continue to market products and product lines under the previously mentioned Penn Crusher, Gundlach and Jeffrey Rader brands. So, we continue to execute our strategy in the Process Equipment Group, and we are very, very pleased with the results that they are generating.

I'll turn a few brief comments to the Batesville business platform which continues to face severe headwinds in regards to burial volumes in the quarter and the year. As you saw in our release last night, the most significant driver affecting Batesville's 3% drop in revenue for the quarter was a 5% drop -- decline in the number of North American burials.

You'll remember from our call last quarter that the US and Canada did not experience material levels of influenza and pneumonia this year, and total death levels continue to be down compared to the prior year. We also estimate that the cremation rate has increased by about 160 basis points. This is somewhat higher than the long-term trend of 120 basis points that we have observed in past years.

While we cannot predict with certainty that the North American death rate will return to normal, most in the industry and in government believe it can and definitely will remain this low and it should move toward historic norm. However, we have no reliable way to predict when or how much those changes might be.

As we discussed in our earnings release and 10-Q filing, net revenue, EBITDA, and net income are down for the quarter in the Batesville platform, as are margins. While external factors like fewer deaths and an increased cremation rate drive these declines and are outside our control, we have identified a number of opportunities and taken specific actions that will make us more efficient and effective in the future.

We are constantly evaluating our performance and right-sizing the organization at all levels to respond appropriately to the changing customer demands and consumer demands in the market, whether they are up or down. Under current conditions in the Batesville business, that means taking some capacity off-line which we have discussed in previous calls. And anytime you relocate production, especially across multiple plants -- sorry, there are costs associated with getting a new line up and running. The Batesville team has experienced some of those unusual situations and they are on top of it and making the necessary adjustments as required.

So as we continue to take decisive actions to ensure that we manage costs, while at the same time maintaining our superior customer service and quality, we are seeing a substantial level of discounting from our competitors. And we are responding as necessary to meet competition.

But in short, we are not going to let our business erode, nor are we going to give it away. Batesville's management team has taken swift and thoughtful actions that reduce costs and preserve the high-quality standards to which they are committed and that their customers deserve.

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

Thank you Ken. At the topline, Hillenbrand's third-quarter revenue grew 13% to $238 million. The key driver of this growth continues to be the Process Equipment Group delivering a 53% increase with total revenue reaching $93 million this quarter.

Now, an important metric we track is organic growth, which we define as the year-over-year comparison of revenue, on a constant currency basis, with all of our acquired companies included in the base year. We believe this is important because it shows comparable performance not only for the core Process Equipment Group, but also the year-over-year growth in nearly acquired Rotex. As Ken mentioned earlier, organic growth for the Process Equipment Group was 5%.

In addition, for the ninth quarter in a row, and in fact ever since we purchased K-Tron, the Process Equipment Group's backlog grew, reaching a total of $140 million at the end of the third quarter. Now, this represents a 3% increase over the second quarter.

As you may recall, future revenue associated with the Process Equipment Group is strongly influenced by order backlog. On a quarter-by-quarter basis, we expect to see some volatility in this number, particularly when we ship very large orders.

However, we are more than pleased to see the continued strong growth in our order backlog. And as we've discussed in many of our past calls, the Process Equipment Group can experience lumpiness from quarter to quarter when sizable jobs are completed and shipped. In 2012, like most years, we have a few unusually large orders and we continue to expect these to positively impact our results in the fourth quarter.

So, given our visibility into backlog, we expect the Process Equipment Group to deliver their largest revenue quarter this year in the fourth quarter. So this also means that we expect our backlog to decline sequentially in the fourth quarter.

Batesville's revenue was $146 million, or 3% lower than the prior year, largely due to a 5% decline in North American burials. Now, given the decline in burials, we experienced aggressive price competition that drove down our average selling price.

Turning to margins, our gross profit margin for the third quarter was 38.1%. On an adjusted basis, it was 38.6%, or 220 basis points lower than the prior year. Now, as a reminder, the items we adjusted for include restructuring charges at both of our business platforms.

Batesville's gross profit margin on an adjusted basis was 35.4%, a 400 basis point decline from the prior year. Lower volume and average selling price, short-term transition costs, and increased commodity and distribution costs were the key drivers in the decline. The Process Equipment Group's adjusted gross margin was 43.6%, in line with the prior year.

Now I'd like to provide a few details on our restructuring actions. At Batesville, we continuously size our operation to respond to changing market conditions and consumer preferences. For example, we consolidated our first and second shifts at one of our plants earlier this year and we continue to refine our manufacturing processes to increase efficiency without compromising quality. When we plan these types of operational changes, we also plan for the incremental costs associated with implementing the change in the short-term, but ultimately we expect to realize annual savings of about $5 million that will positively impact gross margin.

During this past quarter, we completed a workforce reduction at Batesville that we expect will generate $4 million in annual savings. $1.4 million of the $2.4 million in total restructuring charges this quarter relate to that change at Batesville, the majority of which is reflected in operating expenses.

Now, Batesville has maintained a low operating expense-to-sales ratio, on average ranging from 15% to 16%, and the Batesville management team is working diligently to preserve that desired ratio despite the topline pressure.

We incurred $1 million in restructuring charges this quarter at the Process Equipment Group, and as Ken mentioned earlier, we've realigned that organization and consolidated certain manufacturing facilities. The majority of this $1 million charge is reflected in cost of goods sold.

These actions underscore our relentless focus on improving operation to lean, whether we experiencing strong growth, as in the case of the Process Equipment Group, or lower volumes due to market conditions as we are currently experiencing with Batesville. Lean business is ingrained in the Hillenbrand culture. We will continue these efforts to preserve the strong bottom-line results that we demand and that our shareholders have come to expect.

Turning to operating expenses, for the quarter, operating expense as a percentage of sales was 24.2%, or 23.6% on an adjusted basis, both consistent with prior year. We saw improvement at the Process Equipment Group as well as at Corporate with Batesville's adjusted ratio increasing by just about 50 basis points. These ratios include the ongoing amortization expense from the intangible assets of about $1 million per quarter that were established as a result of the Rotex acquisition. Excluding this amortization expense, the operating expense ratio actually improved 20 basis points on an adjusted basis. So, this is evidence that our lean strategy is paying dividends in the form of reduced operating expenses.

Other income and expense was about $800,000 unfavorable to the prior year, nearly all of which is related to the full collection of the forethought note in April of 2011. As a reminder, our full-year results will be negatively impacted by this factor by about $6 million, or $0.06 of earnings per share.

As we discussed in previous calls, some years we experience gains on our Limited Partnership investments and some years we experience losses. For the quarter, investment gains were $1 million, consistent with the prior year. However, on a year-to-date basis, we have had only $1.5 million of investment gains versus the $5 million we had in 2011. Absent significant gains in the fourth quarter, we would have about $0.04 to $0.05 of unfavorability to earnings per share in 2012 compared to the prior year.

Our adjusted effective tax rate this quarter was 29.2%, compared to 31.9% last year. The improvement in our effective tax rate is due primarily to the favorable resolution of uncertain tax positions this quarter. We expect our full-year adjusted effective tax rate to be somewhere around 32%.

And as we like to say here at Hillenbrand, cash is king and our results in this area again were positive as we continue to deliver strong operating cash flow quarter after quarter. Year-to-date, we delivered $110 million of operating cash flow. If you exclude the one-time cash receipt for the collection of the forethought note in 2011, our operating cash flow increased by $14 million or 15% over the prior year.

Net income decreased 5% over the prior year to $21 million with EPS down 6% to $0.34. On an adjusted basis, net income declined by 3% to $23 million, and EPS was down 3% to $0.37 as the strong growth from the Process Equipment Group was more than offset by lower volumes at Batesville. Adjusted EBITDA was $45 million, a 1% decrease compared to the prior year.

So, before I cover guidance, I wanted to mention our recently announced five-year $600 million credit facility which provides us with additional financial flexibility to support our acquisition strategy as well is our ongoing operations. Note that interest costs will increase slightly as the new facility will be about 60 basis points more than our previous facility.

And finally, turning to guidance, we are reaffirming our previous guidance for 2012 -- global constant currency revenue increasing 13% to 15% over 2011, and full-year adjusted EPS guidance of $1.68 to $1.76.

Now, given current conditions that we see, including declining burials due to low deaths, and increasing cremations as well as global economic uncertainties, we would like to caution investors that these conditions may push us near the lower end of our guidance range.

As a reminder, our adjusted EPS guidance excludes the tax benefit we reported in the first quarter related to our international integration, along with the related long-term incentive compensation, backlog amortization and business acquisition costs, antitrust litigation expense and sales tax adjustments. On a GAAP basis, our EPS guidance remains unchanged at $1.70 to $1.78.

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

Thanks Cindy. We hope that you can see that Hillenbrand is a thoughtful, prudent company with a long-term view of the future. We are committed to the proven acquisition strategy that is serving us well and which is driving the transformation of the Company to reduce our dependence on the number of deaths in the United States and give us exposure to growth markets around the world.

We are continuously exploring three levels of acquisitions. The first is tuck-in, or adjacent acquisitions, that support the growth strategies of one or more of our operating companies, and most likely those would be in the Process Equipment Group. These relatively small acquisitions would allow us to increase our ability to offer system solutions, support geographic expansion, or add value to a product line or process. The second level would be to add an operating company to the Process Equipment Group as we did was Rotex last year. And the third type of acquisition would be to add a company that represents a third business platform, one on which future growth could be based.

Please don't assume that mentioning this implies a signal that a platform acquisition is imminent or that it isn't, or that an add-on company is imminent or that it isn't. We are simply being transparent about all the elements that could one day be part of our acquisition strategy, and thereby be part of a larger and more global Hillenbrand.

Our criteria for acquisitions has not changed. We want to continue to build Hillenbrand as a global diversified industrial company with an emphasis on diversification to balance both risk and growth. It's also critical that an acquisition candidate be culturally compatible, successful in its industry, poised for growth and able to leverage our core competencies in strategy, lean business and talent development to accelerate that growth trend.

We stated before the goal is that our strategy will result in revenue growth and profitability. As always, our focus will continue to be on strong cash generation that strengthens our balance sheet, enables us to execute our strategy, and allows us to pay an attractive dividend. We are committed to being careful stewards of the Company and shareholders' investments in our Company, and we want to provide meaningful value to our shareholders despite economic times like these when the global economy is both challenging and increasingly unpredictable.

Now, for our Q&A session, we will be joined by Batesville's President Kim Dennis, and the Process Equipment Group Pres. Joe Raver. We are ready to take your questions. Natalie, if you would open the lines, I would appreciate it.

(Operator Instructions). Daniel Moore, CJS Securities.

Good morning. Thanks for taking the question. The first one, Ken, you talked about the three potential acquisitions. Given the larger new credit facility, should we take that as a signal that you're, if not closer, still actively engaged to looking at a larger third type -- third leg type acquisition?

I think there's two parts to that credit facility. One is it was time to renew the other one. Prior to the spin in '08, we had gotten a credit facility consistent with that spin and that was going to expire, Cindy, in five or six months?

April 2013.

April of 2013. So we spent a lot of time figuring out what's the best time to renew that. And in terms of timing, the one thing you know for sure is when you go to bankers and you don't have much time left, the rate goes up. So we did a lot of careful analysis there. That had a lot to do with timing.

But on the subject of acquisitions, I kind of said it all a couple minutes ago. We are always looking, and they come when they come. And mostly we are looking at strategic acquisitions, and that is an opportunistic venture. You have to find the right thing at the right time. As we say here, you've got to kiss a lot of frogs before you find a princess, Cindy says Prince. And we are kissing a lot of frogs. So we'll let you know as soon as we have something important to say about it.

And maybe indulge me, I'll try it a different way. You called out about $200,000 in acquisition related costs that you backed out in the press release for kind of adjusted EPS. Were those, as you say, across all three, looking at all three, or were those related to a specific acquisition in one of those three levels?

I don't want to get into the categories of acquisitions or the expenses might go to. But I can tell you that we do -- our process is that we view acquisitions for always more than one category.

Absolutely. And Daniel, I'll remind you that what happens here with like Rotex and the acquisition there, we will have some ongoing small amounts of transition costs.

(multiple speakers) It's a mix of those, but we do have a standard process that we use, and we've got a team that is working diligently.

Let me switch gears for one more. As we look out to 2013, you've talked about a goal of double-digit topline growth in the Process Equipment business long-term. You mentioned some of the challenges, Ken, in coal energy, obviously some difficult comps with regard to frac sand related revenue that's been generated over the last several quarters. Can you talk about the sort of double-digit topline type goal for 2013, in the context of some of those challenges?

I would say that there is no question that there are challenges with I think any company setting goals right now. There is so much uncertainty in the world. I'm going to let Joe handle this as well, but he is based in Zurich, as you know, so he is immersed and he is getting the feel and understanding of what the mood is like in Europe and what he sees. Here in America, we can't even tell -- people that run escorts don't have a clue what their tax rate is going to be. In fact, all of us have no clue what our tax rate is going to be very far into the future. What we are sensing is a lot of uncertainty and trying to be alert to the fact that I guess a stampede could be started at any time, but if politicians are going to pay attention and get it a little bit right, they could I believe stop a stampede from starting.

So as we think about the energy business, we are in the coal business and also in the gas business. And there is a natural hedge there, I'll let Joe take it from there.

Yes Dan. Related specifically to coal, we had a mild winter and there has been -- with the really low natural gas prices in the United States, there has been a switch in many power plants from coal to natural gas. So right now, the coal stocks in the power industry are very high, higher than they've been in a long, long time. So that's affecting our mining customers. And also power generated with coal is down as well, as natural gas takes its place. And that's impacting our coal power generation customers, mostly in the form of spare parts. And so most of our business in the US in coal, a lot of it is spare parts. So, we have seen some softening there.

On the natural gas side, the prices of natural gas are low. Pricing drive drilling. Drilling drives use of proppants and so there is a little bit of an imbalance right now in supply and demand. We've seen some of that softness, but we certainly expect the natural gas business to be a really strong business well into the future, both in the US and around the world. And so that's an important business for us, and we remain committed to that business and think it's a good long-term business on the energy side.

Related to coal, the other part of the coal business, as you know, we are really working hard to expand geographically. We've had some nice success in Russia and China, and coal usage is going up in other parts of the world. It's declining in the United States but it's going up in other parts of the world so we've really focused our energies both on new equipment sales and parts business in other geographies. China is a good example of that. So I hope that answers your question.

Very helpful. I'll jump back in queue. Thank you.

Clint Fendley, Davenport.

Ken, Cindy, Kim, Joe, Chris, good morning. I was wondering on how the foreign exchange might have affected the Process Equipment Group's backlog in the quarter.

Let me jump in. First of all, the foreign exchange has not had a big impact on us on a year-to-date basis. It's less than $1 million, actually less than $0.5 million, from a revenue perspective and virtually nothing on the bottom line. In the quarter, we saw a little bit more on revenue; it was around $2million. So I would say that if you translate that into how it's impacted our backlog, it would be relatively similar, so not a significant impact.

Okay, thank you. And a lot of talk obviously in the prior question on the technology advancements that we've seen with drilling technology. I just wonder maybe, Joe, if you could speak a bit more how the Process Equipment Group might even be positioned to benefit from what I think is expected to be long-term growth in the development of natural gas here on a domestic basis.

Yes. It's an interesting phenomenon. As Ken said, there are some pluses and some minuses to that inside our business. We are balanced across coal and natural gas, so from the natural gas, clearly some of the benefits for us is that drilling requires -- horizontal drilling with hydraulic fracturing requires proppants to get pushed in there to separate the shale so that the gas can be released. And so we are involved in equipment that produces those proppants. And so as more drilling occurs in the United States and around the world, that's good for us from an equipment standpoint as more proppants are required.

So as I mentioned earlier, right now with natural gas prices low, and stocks high, there has been a reduction in natural gas drilling in the United States. But again, we expect that to come back. There's a little bit of supply and demand that needs to catch up, but we expect that to come back in 2013 sometime and level out a little bit more, get back to normal.

The other interesting thing for us is that natural gas can be used as a feedstock to create base resins in the plastics industry. And there haven't been -- this predates me by a lot, but I don't think there have been any new base resins plants or capacity built in the United States in decades. Most of it is moved to the Middle East and to China, where they are using oil as the feedstocks. But there are now some active projects for base resins plants, plastics plants, in the United States, and so we see that as an upside. Those revenues won't come in 2013; they're probably 2014, '15 and '16. But plastics production will move back to North America as natural gas prices are low, and it's abundant and it serves as a good feedstock.

So we see a little bit of -- a little positive and a little negative on the coal side, but generally the move in natural gas in the United States has been positive, and we expect that to happen around the world as well.

Thanks Joe. That's very helpful. Switching over to the Batesville side, I'm just wondering on the recent Aurora sale that we had seen, I know we've heard through our channel checks that they have been out canceling and renegotiating some of their long-term supply agreements with their customers. I'm wondering if you guys expected to benefit from this in the second half of the calendar year.

I'll go ahead and take that. Obviously, we keep an eye on everything that goes on out in the marketplace and we would like to believe we are in position with any customer whenever their business comes up for renegotiation. So obviously, for the 15,000 funeral homes out there, we've got our guys out there every day calling on them and trying to take advantage of those opportunities. That's -- we pay attention to what's going on with the customers that we have, and those deals we are working in the pipeline. And while I kind of listen here and there for what's going on with our competitors, we really are driving our own separate strategy on the customers that we are pursuing and working on retaining. So, I really couldn't speak to specifically what Aurora is doing. This is one of those industries where there's lots and lots of speculation and rumor and oftentimes that's not founded in real factual information. But what I can say is our guys are out there and they are working those accounts like they always do every day, calling on both those who are Batesville fans and those that we want to in the very near future become Batesville fans.

Got it. Thanks guys, I appreciate it.

Steve O'Neil, Hilliard Lyons.

Good morning. I just wondered if you could break down the $4.9 million drop in Batesville sales between price volume and currency.

Sure. So volume was about $3 million -- these are all unfavorable, so volume was about $3 million unfavorable, our average selling price about $1.3 million, and then FX about $600,000.

Okay. And can you comment on your sales performance in Europe and in China?

Joe?

Sure. I'm sorry, I want to make sure I heard the question. Comment on sales in Europe and in China?

Yes.

Yes, sure. So a couple of things. One is as we talked about earlier, certainly Europe has been in a state of flux with quite a bit of uncertainty for some time now. We've seen softness in the European business as our customers are hesitant to invest and to add capacity when the future is so uncertain. But we have been -- that's been around for a while, and we are dealing with that situation and continue to adjust to try to improve performance in Europe.

Asia as well has been -- goes with Europe a little bit. They are a big trading partner of Europe. We've seen slowing growth in Asia. But we don't have -- we don't have a historical significant presence in Asia, and so our gains in Asia are really share gains where we are growing in that new market. And so we continue to be very pleased by our progress that we've made in China, especially as we have invested there over the last year and a half or so to build our business in China.

So related to that, as an example, we just moved to a new facility in China. We co-located K-Tron and Rotex, and so we will continue to expand in China and grow in China. So while the economy there has slowed significantly, our performance there remains very positive because we are growing there as we are relatively new in those markets in a significant way.

Thank you.

(Operator Instructions). Jamie Clement, Sidoti.

Good morning. Kim, I'm not sure if this question maybe should be directed towards you, but in terms of some of the restructuring changes that you all have made at Batesville this year, and then alluded to during the quarter, I mean is this -- is your assumption sort of over the next two to three years that the mortality rate and the cremation rate return to sort of the levels that we have seen prior to this year and that this year is an anomaly, or do you all have any sense, information, or opinion that what we've seen over the last three quarters is something that may in fact be sustainable for another four to eight quarters or so?

(multiple speakers) so the way we can think about that is obviously we've got a long history of studying all kinds of different elements of this marketplace, and the size of it and what kind of trends we've seen over the long term.

Certainly, this year is an anomaly in terms of what we've seen over the last 30 years. While we would like to believe that that's going to bounce back, and frankly earlier in the year we haven't ever seen a year where it's as low as it was in the first half of the year and hasn't bounced back in the second, and we still believe that in our part, over the long-term that those trends will even themselves back out. However in the short-term in order to be prudent about our role in the portfolio here for Hillenbrand, we've got to be aggressive about assuming that we may see another part of -- we may see these trends continue and we've got to take actions on our part to variabilize are costs and to take costs out in every way possible so we can make sure we deliver on our role in the portfolio to generate cash and earnings.

So the way we think about it is we've got to take costs out and create a band of responsiveness or a bracket of responsiveness, so that when that -- if and when that returns that we've got an ability to quickly respond on the upside. However, if we continue to see downward trends in these rates for a longer period of time then we are better positioned to respond to that and not have a significant impact on our ability to deliver the earnings that we are committed to.

Very fair, and just a follow-up question if I could. Just an update on the vaults business. Is there any new information there in terms of marketing that product?

We've continue to see growth in the vault business this year, we've actually brought out some products in the lower end of that line in order to make sure that we have a full portfolio, both in terms of price and also in terms of things like size, width, those types of things. So we do have -- we have expanded that line and are seeing some nice pickups in the markets we have launched into. I think I've discussed on other calls that we've moved into specific geographic areas in order to be more effective at how we deploy, and we have continued to see pickups in those areas and we've continued to invest and grow the number of folks that we have supporting our specialty sales force there and the training we are doing with our existing sales force in those markets. Still small but growing. And we continue to chase that opportunity.

Okay, thank you very much for your time.

It's Ken. If I could add something to -- Kim gave a very good description of what she is doing and what her team is doing with capacity, but I remind you of Batesville's long history of using lean to do more with less, to get more throughput in the brick-and-mortar that they have, and that work continues. So, whenever we have taken some element of capacity off-line, it's with the full knowledge that we have the ability to respond to improvements if and when they come, for example spikes for influenza and so on. So they have full capacity to flex their production and handle what they need. That has been one of the things that's really helped Batesville over the years drive greater efficiencies in their business. So if you combine those two thoughts together, their ability to do more with less without adding brick-and-mortar, and being on the safe side, if for example the death rates stay low, I think she's got it positioned exactly the way it needs to be positioned.

Great, thank you very much.

I would characterize it as plan for the worst and be able to respond to the best scenario.

There you go.

Daniel Moore, CJS Securities.

Thank you very much. One quick follow-up. The long-term strategy obviously is to take the strong cash flow from Batesville and reinvest it in attractive businesses. I'm just wondering with the stock at 10 times earnings or below and offering a 10% free cash flow yield, why might you not consider investing in your own stock through share repurchases, which offer obviously pretty attractive return at essentially no risk?

It's a very good question and one that we consider all the time. In fact, at every quarterly Board meeting, we have some discussion of how we're using our cash and how that fits with the long-term strategy and the near-term opportunities. And quite frankly, buying one's stock back can boost the stock price and it makes everyone feel pretty good for a couple of years, but generally the return tails off in 1.5 years or two years. And long-term it pales in significance to the opportunity to grow. So, when you balance that, every quarter when we look at what are the best opportunities, this is considered by the Board. They are the ones that make the decision for that, although we make the recommendation; they are the ones that watch out for shareholders. So I can assure you it's being looked at and it's a consideration. But we remember our long-term viewpoint as well.

Thank you.

We have no more questions, so I'd like to turn the call back over to Chris Gordon for final comments.

Once again, thank you for joining us today. We look forward to speaking with you in November for our next call when we will discuss fourth-quarter and fiscal year results. Have a great rest of the day, everyone. Thank you.

Ladies and gentlemen, this does conclude today's conference. You may all disconnect, and have a wonderful day.