Joe Raver - President & CEO Kristina Cerniglia - CFO Thomas Kehl - President, Coperion.

Daniel Moore - CJS Securities John Franzreb - Sidoti & Company Liam Burke - Wunderlich Securities.

Good morning, everyone and welcome to Hillenbrand's Earnings Teleconference for the First Quarter of Fiscal 2015. A replay of this call will be available until midnight Eastern Time Thursday, February 19, by dialing 1-855-859-2026 toll free in the United States and Canada or 1-404-537-3406 internationally, and using the conference ID number 60438544.

This webcast will be archived on the company’s website at www.hillenbrands.com through March 5, 2015. [Operator Instructions] At this time, it's my pleasure to turn the conference over to Joe Raver, Hillenbrand President and Chief Executive Officer. Mr. Raver, please go ahead..

Thank you, Lisa, and good morning, everyone. We appreciate you joining us this morning to discuss Hillenbrand's results for the first quarter of fiscal 2015 which ended December 31. I'm joined in the prepared remarks portion of our call today by our CFO, Kristina Cerniglia.

During the Q&A portion of the call, we'll be joined by Thomas Kehl, President of Coperion; Kim Ryan, President of Batesville is traveling out of the country and will not be joining us on the call, but we do expect to back next quarter.

Prior to beginning our prepared remarks about the business, I’d like to briefly remind you that during this call, we may use certain forward-looking statements that are subject to the Safe Harbor provisions of Securities Laws. These statements are not guarantees of future performance and our actual results could differ materially.

Also, during the course of this call, we'll be discussing certain non-GAAP operating performance measures.

I encourage you to take a look at our 10-Q which can be found on our website for a deeper discussion of forward-looking statements, the risk factors that could impact our actual results and more information on our use of non-GAAP operating measures and their reconciliation to GAAP financial measures.

Let me begin by reminding you of Hillenbrand's strategy, it's a strategy we crafted at the very beginning of our journey as a public company and our objectives remain unchanged. We seek to leverage our strong financial foundation to deliver sustainable profit growth, revenue expansion, and robust free cash flow.

Over the past several years, we've made strategic investments in a number of acquisitions as well as organic growth initiatives to create value for shareholders.

We continually seek opportunities to make our businesses better by expanding globally, penetrating growing end markets, and improving margins through the application of our Hillenbrand business systems, which includes management practices such as strategy, lean and talent development.

As a result, we've transformed Hillenbrand from the strong resilient North American funeral products business to a growing global diversified industrial company. We are excited about the potential we have to continue our growth and transformation become truly world class. Now let me turn to the results for the first quarter.

As we saw in the press release last night, consolidated revenue for the quarter increased 4% to approximately $402 million and adjusted EPS was $0.49, about 44% higher than the prior year. Top line growth was consistent with our expectations for the quarter, despite some headwinds from currency fluctuations.

We continually look for opportunities to improve our businesses and I'm pleased with the progress we continue to make in reducing costs and capitalizing on synergies with our acquired companies. We were able to expand gross margins and adjusted EBITDA margins in the Process Equipment Group once again this quarter compared to the prior year.

One area where we did not perform as well was operating cash flow. We used $42 million in the quarter, largely due to the timing of working capital, driven by a couple of very large Process Equipment Group projects. We expect to see cash flow improve throughout the year as those projects are delivered and we receive payments.

Overall, we had a solid first quarter. Now, I will focus more specifically on segment performance beginning with the Process Equipment Group. As many of you know, the Process Equipment Group brings industry-leading applications expertise in core technologies that improve mission-critical processes for our customers.

Today, we serve a diversified group of industries, with attractive near and long term growth prospects supported by population growth and in particular an expanding middle class in a number of geographies. Revenue for the quarter increased $14 million, or about 6% over the prior year.

Orders bounced back from the low level we saw last quarter, finishing 17% higher than the prior year. However, while our pipeline remains healthy, order intake in the quarter fell short of our expectations. In particular, several large orders moved out and we experienced continued softness in our base business in Europe and across Asia.

We continue to pursue opportunities to make our businesses more profitable. Our goal is to drive year over year adjusted EBITDA margin improvement of 100 basis points in the Process Equipment Group.

In addition to a number of lean projects to reduce costs and improve efficiency, we are beginning to see some benefit from improved price realilization in areas where our products demonstrate significant added value.

Process Equipment Group gross margin percentage improved by 190 basis points over the prior year and adjusted EBITDA margin percentage was up 390 basis points. Sequential backlog grew slightly over the fourth quarter to $590 million, slightly below the level we had at the end of the first quarter of last year.

As I mentioned earlier, order intake for the first quarter, although an improvement over Q4, was considerably lower than our expectations. As a result, we still have a gap to close in our backlog to fully recover the order weakness we experienced in the fourth quarter of fiscal year 2014.

As we push to close this gap, the timing of new orders will be an important factor in minimizing the pressure on revenue in the second half of the year.

The recent drastic drop in oil prices has created uncertainty among some of our largest customers, consequently we are seeing the timing of some large projects push out as customers are re-evaluating their portfolio of projects and capital spending plans.

With that said, we remain optimistic that the compelling economics of US natural gas as a feedstock for polyolefin production will remain intact and projects will continue to move forward over the short to medium term.

We are talking with our customers and industry experts to better understand the ramifications of lower oil prices and overall demand for plastics over the long-term. In the meantime, our project pipeline remains strong, particularly for North American shale gas-related polyolefin projects.

From a global perspective, recent developments in Russia have caused delays in a couple of large projects there. As I mentioned earlier, we are seeing continued softness in Europe and a general slowdown in projects in Asia. One area that has developed nicely for us over the past several quarters is the profit market in North America.

As you know, we provide high precision screening equipment that is used to process high value products, mostly sand, for hydraulic fracturing. This is an area of our business that continues to be very cyclical, began to pick back up during our last fiscal year and the momentum has persisted through the first quarter.

However, I will caution you that the lower oil and gas prices may have an effect on the demand for the equipment we sell in this area in the near term. But we continue to see potential for long-term growth in this industry. Overall, we have a cautiously optimistic outlook supported by a healthy project pipeline for our process equipment businesses.

Before I move on to Batesville, I'd like to briefly touch upon the decoupling of the Swiss franc from the euro that happened a few weeks back. Subsequent appreciation of the Swiss franc compared to the euro is having an impact on the Coperion business, which has operations based in Switzerland.

While in the context of the overall business, the activity in Switzerland is a relatively modest, we will feel the impact of increased cost due to the stronger franc going forward.

Now let me turn to the Batesville segment, Batesville revenue was up 2% year over year, both the burial casket and cremation products businesses experienced higher volume in this quarter, due in part to more severe flu season this year compared to last. The volume increase was offset partially by decrease in average selling price of burial casket.

For the quarter, adjusted gross margin was down 110 basis points, due in large part to a decrease in average selling price.

As always, Batesville's focus on implementing improvement initiatives throughout the organization take cost out and right sizes manufacturing and distribution footprint, while maintaining the flexibility to take advantage of upswings in the market.

As we think about the longer term trends for Batesville, healthcare is clearly getting better and people are living longer. And that's a good thing.

And while the demographics of an ageing generation of baby boomers are expected to be a factor in the future, it's impossible to predict with any measure of certainty what's in store for the North American death rate.

As the funeral industry continues to evolve, Batesville will be as lean, flexible and profitable [indiscernible] continued generating solid financial results for our shareholders. At this time, I'll turn the call over to Kristina Cerniglia, our CFO.

Kristina?.

Thanks, Joe. As we reported in our filings yesterday, consolidated revenue of $402 million for the first quarter was up 4% year-over-year or 8% on a constant currency basis. The Process Equipment Group delivered 6% growth on higher volume of capital projects and Batesville contributed 2% growth driven by increased burial volume.

Adjusted gross margin for the quarter was 34.8%, or 70 basis points higher than prior year. The improved margin was driven by the Process Equipment Group where we continue to pursue opportunities to become more efficient and promote business lines where our ability to add value is better margins.

Adjusted EBITDA increased 19% over the first quarter of last year to $63 million, an increase of 200 basis points to finish the quarter at 15.8% of revenues.

As a key element of our strategy, we will continue to target further improvements to this metric through the continuation of lean effort across the businesses and ongoing efforts to drive margin improvement in the businesses that we have acquired.

Looking at our bottom line for the quarter, adjusted net income grew 43% to $31.4 million, resulting in an adjusted earnings per share of $0.49 or 44% earnings growth. Once again, the increased profitability in the Process Equipment Group propelled the earnings growth. Our adjusted effective tax rate for the quarter was 28.5%.

We anticipate our tax rate will be approximately 30% for the full year, which is in line with historical levels. Operating cash flow in the quarter was negative $42 million. This includes the payments of approximately $19 million related to the settlement of the Matthews litigation that we discussed on our last call.

The other significant factor affecting cash flow was the use of working capital for large projects in our Process Equipment Group. We are very focused on managing our working capital as efficiently as possible.

However, for some large projects, we incur obligations to pay our suppliers relatively early in the process in comparison to the timing of delivery and payments from our customers. That gap was amplified in the first quarter by delays in the delivery timeline on a couple of significant projects.

As those projects are delivered over the next three quarters, we look to see the positive cash impact to help recover from the low number this quarter.

While the impact on cash was especially to our Q1, working capital fluctuation [indiscernible] in this part of the business and are affected by factors like projects timing and advanced payment schedules. You may recall that cash was very strong last quarter as working capital changes worked in our favor.

Additionally, during the quarter, we paid over $12 million of cash dividends. We also repurchased approximately 200,000 shares of our common stock to offset dilution for a total cost of $7 million.

We regularly review the optimum mix of fixed rate and variable rate debt, and last quarter we shared our plans to take advantage of the historically low interest rate in fixed side portion of our debt. We executed on this plan in the first quarter by fixing $100 million of our debt.

Turning to the next slide, I will discuss segment performance beginning with the Process Equipment Group. The Process Equipment Group delivered $256 million of revenue in the first quarter, representing 6% growth.

Foreign currency fluctuation, especially the decline of the euro relative to the dollar, had a negative impact on the results as growth was 12% measured on a constant currency basis.

The revenue increase over prior year was supported by a higher volume of capital projects as well as continued momentum in our sales into the profit market of equipment and replacement parts.

Order backlog ended higher in the quarter to $590 million, which is about $20 million lower than its level from a year ago or $25 million higher when adjusted for the impact of currency.

As Joe mentioned, order intake improved compared to last quarter and we are cautiously optimistic that our order pipeline particularly in the shale gas polyolefin projects will help that become a trend.

The Process Equipment Group gross margin grew 190 basis points to 32.9% and the adjusted EBITDA margin of 14.9% was 390 basis points better than last year. We were pleased by operating expense discipline in the quarter.

As we've said, this group is very focused on profitability and we expect those efforts will continue to support improved operating margins over time. In our Batesville business, revenue for the quarter was $145 million, up about 2% from the prior year.

Burial volume was slightly higher year over year helping to offset a decrease in average selling price. Batesville delivered an adjusted gross margin of 38.1%, which was lower than last year by 110 basis points. Before moving to guidance, let me briefly add to Joe's comments on the currency situation.

Obviously, the continued weakening of the euro hurts our reported results because of translation. When we think about currency flows in our business, behind the dollar, the euro is by far the most significant. We actively hedge those transactions to protect the profitability of our backlog.

Of course, we cannot fully immunize ourselves to the effects of translations. On the other hand, a weaker euro helps our sizable German operations to be more globally competitive on price. As Joe mentioned, the abrupt decoupling of the Swiss franc from the euro does create some business challenges for us.

Although small in relation to our total enterprise, we anticipate margin pressure and are seeking to mitigate that by sourcing production inputs from other markets when appropriate.

We are maintaining our full-year outlook for fiscal 2015 with sales anticipated to grow 2% to 4% on a constant currency basis and earnings per share expected to be between $2.05 and $2.15 per share. We are still forecasting revenue from the Process Equipment Group to grow 4% to 6% in constant currency.

As you know, this business is comprised of large systems, equipment, replacement parts, components and services. Our revenue can fluctuate as a result of the timing of order placement as well as the general cyclicality of the market.

Given that, we expect growth to be higher in the first half of the year versus the prior year and revenue growth to smooth out a bit in the back half. Batesville is expected to deliver revenue in line with 2014. Given current volatility and foreign exchange rate, we expect a 4% to 6% negative translation impact to revenue compared to 2014.

In summary, our results for the first quarter were solid. We believe our continued effort to control cost and improve operating leverage will help offset global economic uncertainty. As a result, we remain confident that we are well positioned to deliver on our plans, including building on our trends of revenue growth and margin expansion.

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

Joe?.

Thanks, Kristina. Overall, I am pleased with our first quarter performance. In the midst of challenging macroeconomic conditions, we grew revenue and expanded margin, we made progress on lean productivity initiatives across the organization and are well positioned to continue those trends.

Our management team will continue to execute this strategy that has served us well that is to transform Hillenbrand into a global diversified industrial company, we need to grow the business both organically and through acquisitions while improving overall profitability and ultimately providing meaningful value to our shareholders.

This concludes our prepared remarks. For today's Q&A session, we're joined by Coperion President, Thomas Kehl. We are ready to take your questions.

Lisa, would you please open the phone lines?.

[Operator Instructions] And our first question comes from the line of Daniel Moore from CJS Securities..

Joe and Kristina, the performance in Q1 obviously very strong, but the commentary was rather cautious.

Maybe given all the various moving parts in oil and FX, just talk about your confidence around the guidance range for the full year relative to where we were perhaps two months ago?.

I'll take the first part of this and then I'll let Kristina make some comments around the implications of foreign exchange. We did have a strong first quarter, we are very pleased with the first quarter. As you know, backlog came down in the fourth quarter as we had a little bit softer order intake than we had expected.

With some of those orders moved into Q1, quite frankly we expected a stronger order intake in Q1 than we received.

So we have visibility to those projects, we don't think those projects are cancelled, they've just moved out a little bit I think as the market has gotten a little bit more cautious and some of our larger customers that operate both in the polyolefin business as well as the energy business reevaluated some of their capital projects.

So we expect some of those projects to move out a little bit. And that will be the key to our year. Batesville had a solid first quarter, we expect a solid second quarter out of Batesville, our base businesses are in very good shape and it's really going to be the timing of some large projects that will be the driver for the balance of the year.

And as I said, we believe those projects are still going to happen, it's just a matter of timing. But overall, the businesses are running well as you can see in the profit improvement.

So the businesses are running well, so really the large projects that will drive the balance of the year and that timing is sometimes, as you know, difficult to predict. So we have good confidence, we have confidence right now in our guidance other than the large projects, which are always difficult to predict..

And Dan, as we mentioned, guidance is on a constant currency basis. So 2% to 4% growth that we are sticking with that for the reasons Joe just described. In guidance, last quarter we did assume a 4% negative translation impact. It might be 4% to 6% given the volatility in the FX rates at this point.

So on an as reported basis, you can consider it really flat to slightly negative..

Very helpful..

[Operator Instructions] Our next question comes from John Franzreb from Sidoti & Company..

Just back to the guidance, Kristina, I think you touched on it where this year has gone.

On current currency rates, we are looking for revenues to be down 2% to up 2% for the full year?.

I would look at it as down to flat..

Down to flat, okay.

And there is still no implications on EPS at the current currency rates?.

At this point, no. We had, if you recall in our guidance, we had incorporated about $0.07 of FX impact to our EPS and that has not changed..

Okay. And regarding the backlog weakness shown in it, can you just provide a little color, are these projects already started at your customer's locations, you are providing equipments to projects that is already underway.

That's where you have some certainty or are these new projects for your customers that haven't started and the delay in the decisions because they want to conserve cash, I don't know if they need it, do you have any kind of clarity what kind of timeline we are on the projects with the customers?.

Sure. Some of these projects, the ones we are talking about are really big projects, we are in really close communications with our customers. I will put them in a couple of buckets. One is, once we get an order, the project has already started and there is a really low likelihood that the project is going to be cancelled or to push out significantly.

So for example, this quarter we had some customers that had some site issues, so therefore projects delays a bit. And then it takes us a little while then to ship. But we have the equipment ready, ready to be shipped, you saw the cash flow, this month we had to pay some vendors for that. But the customers just isn't ready to accept the equipment.

And so that will happen to us. And again, that's just some timing as it moves from quarter to quarter and that can move both directions to be honest with you. The second part is projects that are already started. While we haven't received an order yet, we are having a word at the order, those tend to also – they are unlikely to be cancelled.

They may move a little bit as they – customers look to ship some capital spending is from quarter to quarter et cetera or projects get delayed, but those projects will come as a matter of when and then the third category is a little bit longer term. So we see projects in the pipeline.

They haven't really broken ground, they haven't spent time or money on the project, those are the projects that have the potential to be moved out more significantly based on global macroeconomic issues and end market issues, those kinds of things..

Okay.

In those three buckets, the ones that give you certainty I imagine of falling into the first two mostly and you're not really relying on the third bucket, or do you need that third bucket to come in to hit your full year number?.

No, you are right. So the first one is just some movement from quarter to quarter. The second one, that's really – if you think about revenue and hitting guidance for the year, it's really that second bucket. So we know the projects are out there, it's very highly likely that the customers will execute on the full project.

It's really a question of the timing and how they are viewing the timing of those projects and when those projects will be awarded..

Got it.

And in your prepared remarks, you said PEG had some pricing that it can push into the market, can you just talk a little bit of what product lines or what end markets that you have pricing power in?.

So I think it's a couple of things. We have taken action across the board to realize better pricing in where we create significant value. And maybe I didn't describe it very well, I think Kristina did a better job, it's also we are very focused on those product lines where we have lots of value and consequently get better margins.

So it's not just pricing, it's also the mix of business that we are focused on, very focused on that part of the business where we have the most value and where we can create the most value for customers and where we tend to get better margins, because we can serve our customers better than our competitors.

And so you're starting to see that shift, if you look back at the EBITDA margins in the Process Equipment Group, you are really starting to see that shift in the third quarter of last year as we have put some programs in place to focus on improved profitability.

So we are trying to get it from every level, there is some price, there is a lot of cost out activity going on and then we will focus on those product lines and lines of business where we get the best margins, as we get an increased mix as well..

Okay.

And just shifting over to Batesville, I was surprised by the magnitude of the gross margin degradation, you mentioned average selling price, it seems that either significant especially given the timing of the year, I always thought the early summer months is when you are most susceptible to price decreases at least, can you just talk about what's going on there, competitive landscape, what's driving that?.

Sure. So there are a couple of issues. One is, as you know, customers by ahead of our price increase. So we have well established annual price increase that happens at the beginning of our fiscal year and customers buy ahead of that.

We saw a slightly larger buy head than we normally do and then we did last year, this year and so those tend to be higher mix of products. And so as we flow into the first quarter after that price increase, if it's the other way, volume was good because of the market, because customers buy ahead on the higher end products, the mix shifts a bit lower.

We expect that trend to disappear as we head into the second quarter and have our normal mix trends, so that's one issue. It's not really price pressure per se, it's the mix of business in terms of average selling price. And then the second part of it is, as customers, as volumes goes up, customers hit the higher rebate years.

And so we have volume based rebate years and we saw some of that hit us in the quarter. So it's a positive thing from a volume perspective, but those two things came together to give us a slightly lower gross margin. And then just finally, there is a very small impact in the quarter, but people – some people talk to us about lower commodity prices.

We actually had slightly unfavorable commodities prices in the first quarter because while gasoline prices have declined, diesel fuel has in decline much and we see year over year increases in steel and particularly hardwoods that the industry is seeing.

And so as that flows through, we expect to have a more normal mix and more normal and strong gross margins as we head into the second quarter..

Okay.

So you'd look for a rebound in the margins in the next quarter?.

Yes. At the bottom line, Batesville machine is running well. So we don't have operational issues that are causing margin issues..

Perfect, okay. I’ll get back into queue, guys. Thank you very much..

[Operator Instructions] Our next question comes from the line of Daniel Moore from CJS Securities..

Thank you again. Going out past – beyond the current guidance, just talk about, Joe, what is the volatility in oil and more specifically the rise in the dollar.

Do you see that having any impact on the longer-term opportunity in plastic manufacturing in North America from a competitive standpoint?.

That's a question that we are really working hard to answer right now. The Coperion folks have been talking to their customers to try and get a sense of what the decline in oil prices means for the long term demand in plastics. We've seen the price of plastics come down, base resins come down in the marketplace.

And so we firmly believe, at least in the medium term that the North American shale gas phenomena, the different between the price of oil and the price of natural gas is still big enough that natural gas is still compelling feedstock for the production particularly of polyethylene.

So we don't think that there will be a big downturn in production and capacity going into North America related to the shale gas phenomena.

Over the longer run, I mean my personal belief is over the longer run declining plastics prices in general will create better demand over the longer run as plastic continues to replace more expensive and difficult to work with materials in housing, automobile, all sorts of products as it's been doing for a couple of decades.

So what the long-term impact of oil prices are, I think generally it's going to be good for the economy, it might take a little while, so I think that's good, that improves consumption, plastic prices have – will remain lower there, I think it will be good for consumption which then in turn I think will be good for investment capacity over the long run..

Very helpful. And maybe just shifting gears, the current quarter sort of cash generation notwithstanding, leverage continues to come down and relatively quickly and will likely come down once again this year as you generate more cash.

Can you talk about the use of the capital, the acquisition pipeline and if you are not able to find something over the next 12 to 24 months, would you just continue to hammer away and pay down debt or is there other alternative uses you consider?.

So as you know, as we think about capital, we return about $50 million a year to shareholders in dividends, we buy shares back to offset the dilution each year typically and then if we don't find an acquisition that meets both our strategic criteria and then gets a good financial return for our shareholders, we use the excess cash to pay down debt or invest in organic opportunities.

And so, thus far we haven't done an acquisition in a number of quarters, we've used excess cash to pay down debt. Certainly for the next few quarters, we would expect to continue that same strategy of using excess cash to pay down debt.

And then if some point as we go forward, we will re-evaluate, we are constantly evaluating, but we'll re-evaluate more significantly if that's still the right strategy for the use of excess cash that we are generating.

Related to the acquisition environment in our pipeline, we are very active looking for acquisitions, we get visibility to lots of interesting and good deals.

As you may know, particularly in the mid market right now, multiples are extremely high and so I think we ended 2014 with one of the highest levels in history in terms of that midmarket acquisition, acquisitions from like $100 million to $500 million, multiples are very high.

So we are being very disciplined in our approach to acquisitions, we've seen a number of businesses we really liked, but we need to make sure that it provides the right returned to shareholders. So we are still active and when we don't make any comments about where we are in the pipeline and we have something to announce, we will announce it..

Thank you..

And our next question comes from the line of Liam Burke from Wunderlich Securities..

Joe, one of the priorities that you had laid out was the margin improvement on Coperion front.

During the quarter, how would you rate the progress you've made in moving those operating margins up?.

So if you figure out a Process Equipment Group in total and Coperion is obviously the largest part of that and is really the driver in many ways of what you've seen on the results. I think if you go back now for three quarters in a row, we've had very nice expansion in our margin or EBITDA margins.

And quite frankly, we finished the year last year – the fourth quarter is a very strong EBITDA margin quarter for us, again strong this quarter and so we've actually been slightly ahead of expectations in terms of margin improvement across the entire Process Equipment business and that includes the Coperion business.

If you look at our EBITDA margins in the Process Equipment Group, the comparables start to get a little bit more difficult in the next few quarters, particularly in the third and the fourth quarter. But we continue to drive the business for improved margins and use as many levers as we can to get there.

Thomas Kehl and his team is certainly focused on improving margins and we are starting to see some sustained evidence of that at this point..

Great, thanks Joe. And you did talk about pricing on acquisitions being relatively high.

Are you seeing any directional easing of that or are they still pretty stubborn at these levels?.

What we’re seeing right now is they remain pretty high and of course it varies from deal to deal and those sorts of things. But it remains pretty high.

I think if you talk to others out in the market place and we talk consistently with our corporate development group, and they’re very active in the market, multiples are high, which makes it a bit more difficult to find the right fit financially, but we’re determined to continue to do acquisitions but we remain disciplined..

We have no further questions in queue. I’d like to turn the call back to presenters for closing remarks..

Once again, I just like to thank everyone for joining us today. We really appreciate your time. We look forward to speaking with you again at our second quarter earnings call in April. Have a great rest of the day. Thank you everyone..

This concludes today’s conference call. You may now disconnect..