Hillenbrand Inc (HI) 2013 Q1 法說會逐字稿

Good morning, everyone, and welcome to Hillenbrand's earnings call for the first fiscal quarter of 2013. A replay of the call will be available until midnight, Eastern time, Tuesday, February 19, 2013 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 72270230. This webcast will be archived on the Company's website at www.hillenbrandinc.com through March 5, 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 content. At this time, it's my pleasure to turn the conference over to Chris Gordon, Director of Investors Relations. Mr. Gordon, please go ahead.

Thank you, Stephanie, and good morning. Welcome to our earnings call for the first quarter of fiscal 2013, which ended on December 31, 2012. With me on today's call is Hillenbrand's 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 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 that we filed 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 calls. We've scheduled one hour and we'll 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, and Cindy will follow with financial results, and Ken will wrap up the prepared portion of the call with some closing comments. After that, we'll move directly to Q&A when we'll be joined by Batesville President 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. Good morning, everyone, and thank you for joining us today. This was an important quarter for us on several fronts.

As you know, we completed the transformational acquisition of Coperion Capital GmbH, welcoming them to the Hillenbrand family on December 1. And in the early goings, we're pleased with Coperion's performance, especially as we've gone down the path of integrating certain high priority processes.

Our revenue increased significantly, growing more than 30% year-over-year, results that were supported by the process equipment group and the Batesville platform. In fact, Batesville's quarterly growth was the largest it has been in several years. And I'm also pleased with our bottom line as we posted strong adjusted EBITDA growth of 6%. Cindy will provide more details regarding the financial results in just a few minutes. I would like to start my discussion of the platform performance with the process equipment group which grew significantly, due primarily to the Coperion acquisition. Revenue grew 80% to more than $150 million, and backlog quadrupled to the first quarter of 2012. Backlog gives us visibility future revenue, so it's a metric that we monitor closely. I'd like to spend a few minutes giving you some detail regarding our current position.

As a reminder, the process equipment group serves a variety of industries, which provides a measure of market and geographic diversification. We are pleased that backlog in some of our largest segments, particularly petrochemicals and plastics, remains solid. However, we've begun to see signs of some slowing of capital expenditures in certain end markets we serve. In fiscal 2012, the demand for proppants, which are used in the hydraulic fracturing process of natural gas drilling, experienced a dramatic, almost explosive, acceleration. This had the effect of pulling equipment sales planned for 2013 into fiscal 2012. As a result, there's very little related to fracking equipment our current backlog. However, we believe that demand will catch up with current supply, and over the long run, this will remain a very attractive market segment for us.

We've also seen a slowdown in capital equipment orders, primarily in coal and potash, with some projects getting pushed out to 2014. Much of this appears to be driven by the general economic and business uncertainty in Europe. On a positive side, we feel confident about the petrochemicals and plastics industries, and believe they are leading a renaissance of manufacturing in the US. As you may know, natural gas is used as a hydrocarbon feedstock for plastics. The vast supply and low pricing of natural gas in the US is leading the plastic industry back here and pulling manufacturing and support manufacturing with it, as every business likes and needs to be close to its supplier.

There's also an increasing demand for coal in geographies outside of the US, as China, India, and Russia experience increased demand for energy, primarily derived from coal. If you listened to our earnings call before, you've heard us say that a core element 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. Coperion is a great example of how this strategy is working, and I'd like to update you on the integration process for Coperion.

Joe Raver and his leadership team are diligently executing actions to capitalize on selected near-term opportunities, while also structuring the group for long-term gains. They're following a very disciplined process in managing the integration efforts that include full-time senior leadership and on-the-ground resources in Germany, with joint work teams and cross-company participation.

You may recall from our previous discussions that our number one integration priority is increasing cross-product utilization. That is having Coperion sell other process equipment group products within their systems and vice versa. We believe that providing complete system sales gives us a competitive advantage, and the customers prefer doing business with one trusted supplier that can provide a turnkey system for them. We have already quoted a number of projects that incorporate products from multiple product families from within the group.

One of the core competencies we bring to our acquisitions is the implementation of lean business systems from the shop floor to the office, and we've already begun this piece of our integration process with Coperion. Significant time and resources are being devoted by both Hillenbrand and Coperion people to educate the team on lean principles and how to create value using them in the organization. These lean activity also be essential as we work to increase Coperion's margins and overall profitability.

By the end of March, nearly 100 of their worldwide management team will be through the initial lean training, and multiple improvement projects have been identified, with several already underway. Using Coperion's existing geographic network of 29 parts and service centers to accelerate the growth of our existing process equipment group businesses is an opportunity for us in great many geographies.

Overall, we are pleased with the initial progress, but we realize that we have several years work ahead of us and we're very bullish on the benefit is of the acquisition and will continue to update you on the integration process during the year.

Turning briefly to Batesville. Batesville, as I said, had the best quarter that they've had in a long time, growing revenue 4%. North American debt has returned to generally historic levels, although cremations continue to grow at the past rates of about 120 or so basis points per year. This resulted in a more normal decline in burials this quarter than the spike we saw a year ago.

Given the volume decline we experienced at Batesville last year, the Batesville leadership team has implemented several actions to rightsize the organization and to further improve their production and logistics capabilities. These actions make them more agile to compete in changing market conditions and to meet the requirements of their customers. And now the results of these actions and others have enabled Batesville to improve their gross margins sequentially for the second quarter in a row, now approaching 40%.

As we think about the longer term trends in the funeral products industry, we know that health care is getting better and thank goodness it is. People are living longer, which is good news for all of us, and the point here is that we cannot predict with certainty what the North American burial demand will be, and we need to continue to be as lean and flexible as possible to meet the evolving needs of our customers and the families they serve.

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

Thank you, Ken. In summary, this was a strong quarter for us, with attractive growth at the top line, as well as the bottom line on an adjusted basis. Revenue grew 32% to $305 million, and driving this growth was the acquisition of Coperion, with our process equipment group delivering $154 million in revenue, about an 80% increase over the prior year. Now, without the addition of Coperion, the process equipment group would have shown a slight decrease at the top line, as we saw a few large jobs push out to the second quarter. I'm sure you'll recall that we periodically experience this lumpiness when large orders are in our backlog, and it can cause fluctuations from quarter-to-quarter.

As Ken mentioned, Batesville had a strong quarter, with revenue growing 4% to $151 million, and this was driven by volume as the year-over-year growth rate of North American death returned to more typical historical levels. I do want to mention that influenza did not have a significant impact on first quarter results, while flu activity did begin to increase during the quarter, pneumonia and influenza mortality didn't reach epidemic levels until January.

Turning to margins, our gross profit margin for the first quarter was 36.2%. On an adjusted basis, it was 37.2% or 100 basis points higher, and that represents about a 330 basis point decrease from the prior year. Now, this decline was expected and it's entirely due to the addition of Coperion, which has lower growth margins because about a third of their revenue comes from third party-sourced products or buyouts, where margins on buyouts are fairly small. So the other two-thirds of their revenue comes from their proprietary equipment sales and parts and service, both that have very attractive margins that are similar to the margins of our other Process Equipment Group products.

So, on an adjusted basis, the impact on the process equipment group this quarter was a decline in gross margins from about 42% in 2011 to about 36% in 2012. You should expect a greater impact on gross margin in the future as the full three months of Coperion operation also be included versus the one month included in our first quarter. Gross margins in the process equipment group should be in the 31% to 33% range on a go-forward basis.

Batesville gross profit margin was 38.7%, or 38.9% on an adjusted basis. The 70 point year-over-year decline was primarily due to changes in employee benefits that reduced expense in the prior year and won't recur this year, as well as increased commodity costs.

Our adjusted effective tax rate this quarter was 27.9%, compared to 30.6% in the prior year. This improvement was primarily due to the acquisition of Coperion, which has a larger percentage of income that comes from lower tax rate jurisdictions. Now, looking forward, we expect our full-year adjusted effective tax rate to range between 30% and 31%. Operating cash flow was $20 million this quarter, compared to $27 million in the prior year. This decline was due to $8 million in business acquisition costs related to Coperion, and $5 million related to anti-trust litigation.

Turning to bottom line results for the quarter, net income decreased 54% to $14 million with earnings per share down 54% to $0.23. The decrease was driven by the tax benefit recognized in the prior year due to the international integration, as well as higher acquisition-related costs in the current year. Now, on an adjusted basis, net income increased 4% to $26 million and earnings per share increased 3% to $0.41.

Given our strategy to grow through acquisition, it's a natural consequence to incur related expense, such as amortization and interest. So accordingly, EBITDA is an important measure we use to measure our ongoing operating performance. Hillenbrand's adjusted EBITDA increased 6% to $51 million. Now, given Coperion's average adjusted EBITDA margin of 10% compared to the higher margin of our existing businesses, it's a natural result that the growth rate in adjusted EBITDA will be lower than that of revenue during our first year of acquisition.

So, in other words, if Coperion carried the same margin as our existing businesses, we would have achieved an EBITDA growth rate more in line with our revenue growth. Turning to guidance. We are reaffirming the guidance we shared with you in our announcement of our closing of our acquisition of Coperion in early December, and we continue to expect 2013 global revenue to be approximately $1.6 billion, and adjusted diluted earnings per share to range from $1.82 to $1.92. Based on our visibility in the backlog, we expect the fourth quarter to be the largest, both from a revenue and earnings perspective, and followed closely by our second quarter, which is driven by the seasonality of Batesville's business.

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

Thanks, Cindy. As most of you know, Hillenbrand is a thoughtful, prudent company with a long-term view of the future. We're deeply committed to the disciplined acquisition strategy that has been the key to our growth these past few years, and we will always make the best decision for the long-term increase in shareholder value. We'll continue to build Hillenbrand as a global industrial products company, with an emphasis on customer and geographic diversification to balance risk and growth. As I said the last call, the Coperion acquisition is the latest step in this strategy, and while evaluating acquisition candidate companies is a continual process, we have a lot to keep us busy right now, and we remain focused on the Coperion integration process. Our goal continues to be that we will implement our strategy to result in revenue growth and profitability.

Our focus is on strong cash generation that strengthens our balance sheet and enables to us execute this strategy, and we're committed to be very careful stewards of the Company, and to provide meaningful value to our shareholders. Now for our Q&A session, we'll be joined by Process Equipment Group President Joe Raver, who is in Zurich, Switzerland, and Batesville President Kim Dennis. We're ready to take your questions. Stephanie, would you please open the lines?

Thank you. (Operator Instructions). Our first question comes from Daniel Moore from CJS Securities. Your line is open.

Good morning.

Good morning, Dan.

Could you talk a little bit about the tone and direction of the activity in process equipment, Ken? Last quarter, you talked about fiscal cliff-related fears. Maybe give us a sense for whether or not things have -- you still took a cautious tone in your comments on some of your end markets. Are you seeing any improvements or pick up that now that we've gotten past that? Do you still expect mid-single-digit type organic growth in the process equipment group for 2013?

Dan, I'll give you sort of a high level look of what we see both here and in Europe especially, then turn it over to Joe, who is much closer to this than I am. We monitor a number of manufacturing organizations and other sources to try to find out what sentiment is, especially because so many investors and frankly so many business people are not sure what the rules are going to be, and they're not sure what conditions are going to be in the future. That's what we think we're seeing a couple of markets that we serve, not that we're getting orders canceled, it's that people are saying a little more time to make this decision. Probably a bit more prevalent right now in Europe than it is in the US. Joe, will you build a little more on that?

Sure. I think what you said is exactly right, Ken. We're certainly feeling uncertainty in the economy. As Ken has said, it's more pronounced and it's been lasting longer in Europe. We've seen more activity in China specifically. The US, as you know, there's been a lot of uncertainty in the US, and we're beginning to feel that that's starting to ease a little bit. But generally the economy is not terrible right now, but it's certainly not as robust as it was coming out of the last downturn. Then, from an end market prospective as Ken mentioned, we saw big pull ahead in frack sand equipment in 2012, and that will not repeat in 2013 as supply and demand get back into equilibrium, but we remain bullish in the market both in the US and ultimately around the world as we go forward.

I just want to jump in real quick, Dan, and mention, yes, we still anticipate the low-single-digit growth for the non-Coperion Process Equipment Group revenue in 2013.

Perfect, thank you. Switching gears a little bit to Batesville. Obviously, very strong quarter. Had a little bit of an easy comp last year, revenue up 4%. Gross margin, though, is down slightly year-over-year. Cindy, you mentioned some of the costs there that may have favorably impacted last fiscal Q1. Can you give us a little bit more detail and whether you expect to see gross margins perhaps improve modestly from here throughout the year?

Let Kim handle that one, yes.

Hi, Dan, this is Kim. Last year when we made those, we made a number of one-time favorable adjustments, or adjustments that will not repeat this coming year, around some of our policies and procedures -- and then those were in the neighborhood of about $1.3 million on the margin line last year for Q1. So, when you take those and some other benefits that will not repeat in quarter one, you really are pretty comparable quarter-to-quarter.

Perfect, that's helpful.

The benefit that we see an adjustment of the costs that we took out over several quarters last year, those really coming through as we're operating at lower volumes, but still we're able to return to the same margin levels that we've been historically seeing.

Very helpful. Finally, the competitive environment in caskets. Previously during last year, there was some discounting going on -- given that the market has stabilized a bit, has the competitive dynamic improved at all?

Well, most certainly I think that dynamic will be a long-term dynamic that we will continue to see. Volumes are -- we are in a continually declining market, back now to normal levels, but as some of the smaller competitors that continue to fight to hang on to volume, you're going to see that they will continue to do discounting. I think this quarter, everyone's been really bracing hard to serve the needs of our customers as we go into our busy time of the year here. But most certainly people want to hang on to the customers that they have and the agreements that they have, and I don't think we should expect to see any lightening of that over can the coming quarters.

And with the strong flu season upon us, any risks that you've cut too hard in terms of capacity, or do you feel comfortable with the ability to service?

No, I'm glad you asked that question. We do feel good about where we were, where we are right now. Of course, we're working extra hours, as I'm sure many in this market are -- certainly our customers are. But we feel when we made the adjustments that we made a year ago, we made those adjustments with keeping in mind is what we refer to as a bracket of responsiveness, which means we understand generally the fluctuations that the marketplace sees over the course of the year, so we take into consideration those type of things when we adjust our capacity so that we're able to respond through overtime, through weekend work, through adjustments in our inventory levels, all of those types of things we use to respond to changes and fluctuations in the market demand. While we certainly are working extra hours now, we are in a good position in terms of responding to customers' needs as they serve those families.

I'll jump back in queue. Thank you very much.

Thanks, Dan.

(Operator Instructions). Our next question comes from Steve O'Neil from Hilliard Lyons. Your line is open.

Good morning.

Hi, Steve.

Good morning, Steve.

You all reported about $5.1 million increase in casket sales. I wonder if you can break that down between price, volume and currency?

Sure, absolutely. Volume was $3.7 million, and then the mix impact was $1.6 million, and currency was about $400,000.

$400,000 negative?

No, positive.

Okay, that adds up to a little bit more. Okay, that's rounding. What were CapEx in the quarter?

CapEx was $5.6 million.

Okay. You mentioned that process equipment was down slightly adjusted for Coperion. Can you tell me how much? That means Coperion probably added about $70 million. Can you give me the number that added for the month?

No. We do not plan on disclosing separately under the process equipment group how each one of those is performing, Steve.

Okay.

But you can do your calculations and come to a conclusion.

Okay. I know you've only owned it a month during the quarter, did it have any impact on earnings, positive or negative?

Well, Coperion had a positive impact on earnings on an adjusted basis, but remember we had the impact of the backlog and the inventory step-up, as well as the acquisition expenses that we had in the quarter, so there's a lot going on. But net of all of those kinds of things, yes, absolutely had a positive impact.

Great, thank you.

Thank you.

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

Once again, thank you for joining us today, and we look forward to speaking with you again in May for our next quarter's call when we will discuss our second quarter results. Have a good rest of the day, everyone.

Thank you, ladies and gentlemen that does conclude today's conference. You may all disconnect and have a wonderful day.