Joe Raver – President and CEO Kristina Cerniglia – SVP and CFO William Canady – SVP, Corporate Strategy & Industrial Products.

Daniel Moore - CJS Securities, Inc. John Franzreb - Sidoti & Co. Liam Burke - Wunderlich Securities, Inc. Gary Farber - C.L. King & Associates, Inc..

Good morning. My name is Shaun. I'll be your conference operator today. At this time, I'd like to welcome everyone to the Hillenbrand's Fourth Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

President and Chief Executive Officer, Mr. Joe Raver, you may begin your call..

Thank you, Shaun. Good morning, and thanks for joining us on our fourth quarter fiscal year 2015 earnings call. Joining me on the call today will be Kristina Cerniglia, our Chief Financial Officer; and Bill Canady, Senior Vice President, Industrial Products and Corporate Strategy.

Prior to getting into 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 provision of the securities laws. These statements are not guarantees of future performance, and our actual results could differ materially.

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

I encourage you to take a look at our 10-K, 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.

We'll be using a slide presentation, which is out there on our website, which we will go through simultaneously as part of the presentation.

Today, I'll discuss our full year results and outlook for fiscal 2016, as well as update you on the strategy that underpins our vision to transform Hillenbrand into a world-class, globally diversified industrial company.

As we have communicated, we seek to leverage our strong financial foundation and the Hillenbrand operating model to deliver sustainable profit growth, revenue expansion and free cash flow. We remain committed to investing our cash organically as well as in acquisitions to drive profitable growth and create shareholder value.

We've stated we're focused on growing our company profitably by, one, expanding globally; two, penetrating growing end markets; and three, expanding margins through operational improvement. We often refer to the Hillenbrand operating model when discussing our results.

The Hillenbrand operating model is a framework and process that enables us to produce consistent and sustainable results. It incorporates the management practices that have been among Hillenbrand's strengths for years including strategy management, lean business practices and intentional talent development.

We use the model to understand our businesses better and bring focus to the critical few things we can do to create sustainable value for our customers and shareholders. Those of you familiar with our story know this is a relentless pursuit for us.

The operating model has provided the blueprint for improvements we've made throughout the organization, in particular, fueling the margin expansion in our Process Equipment Group. Looking ahead, we expect to benefit from work we were doing to segment our businesses and focus on our most profitable product lines.

For example, we expect to continue to expand our parts and service business within each of our operating companies. We have a solid installed base of equipments and systems, for which, we are uniquely qualified to provide the highest quality aftermarket support.

Clearly, acquisitions have been an important element of our strategy over the past several years. We've completed a number of significant transactions to form what is now our Process Equipment Group.

The Process Equipment Group businesses are leaders in their respective markets and are highly valued by customers for their ability to solve difficult problems through strong technical and applications expertise.

For the past several years, they've helped transform Hillenbrand from a North American death care company to a diversified industrial company, serving end markets around the world with considerable potential for long-term growth. As you know, we completed our most recent acquisition, ABEL Pumps, shortly after the end of the fiscal fourth quarter.

ABEL is a globally recognized leader in positive displacement pumps with a portfolio consisting of pumps, large, highly-engineered pumping solutions, and aftermarket parts and services, which as you can see on the slide, makes up more than 40% of revenue.

Their equipment is sold primarily into the wastewater treatment, power generation, general industrial markets. The acquisition of ABEL advances our growth strategy and provides Hillenbrand an entry into the flow control space. Flow control has solid underlying market potential with attractive long-term growth trend.

That growth is fueled by industrial development with an increase in infrastructure expenditures in developing economies, particularly in Asia and South America. Additionally, demand is supported by energy consumption, environmental compliance, and aging infrastructure in mature markets.

When we identify acquisition targets, there are number of criteria that are important to us. Similar to the businesses that make up our Process Equipment Group today, we look for companies that serve niche markets that demand a high degree of engineering and applications expertise.

We would like to see a healthy base of recurring revenue from replacement parts and service along with opportunities to provide ancillary products. Additionally, we look for opportunities to expand our business into new end markets and geographies. ABEL fits these requirements nicely.

We expect to realize synergies with our investment in ABEL by introducing our operating model and by leveraging the capabilities and resources of our existing industrial businesses. The quality of the company's reputation and brand as well as its management are also important considerations.

We are excited to welcome the ABEL team to the Hillenbrand family, including its very experienced and professional leadership team. Before I turn to our results for the quarter, I'd like to provide a brief update on the leadership transitions at our two largest operating companies.

Early last quarter, Kim Ryan and Chris Trainor were named the permanent presidents of Coperion and Batesville respectively. As I mentioned on the last call, both Kim and Chris have done a nice job transitioning into their new roles.

The timing has worked out very well as both have had the chance to lead their respective strategy and budgeting processes for the current fiscal year. I've been very pleased with how smoothly the transitions have been made for these two key positions. Okay. Now, let me turn to our results for the fourth quarter.

I'll make a few summary remarks and then Kristina will walk through our results in more detail in her portion of the call. 2015 has been a year characterized by a number of challenges, not just for Hillenbrand but for the industrial sector as a whole.

We discussed on previous calls the well-known headwinds we faced throughout the year including currency, a tepid environment for capital investment, and slowdowns in some key markets. Those challenges were magnified in our fourth quarter results when compared to the record performance we had a year ago.

Revenue and adjusted earnings were down primarily as a result of the weaker markets and business environments confronting our Process Equipment Group. On the positive side, we had constant currency order growth compared to last year for the second consecutive quarter in the Process Equipment Group.

And Batesville achieved volume growth again this quarter, despite an estimated decline in burial demand. Despite these headwinds, profitability improved. We delivered another quarter of EBITDA margin expansion in the Process Equipment Group, helping us exceed our goal of 100 basis points improvement for the year.

Batesville's gross margin improved over the prior year, and sequentially from the third quarter as the business turned the corner on the operational issues we discussed last quarter.

Taking into account the full year, we finished fiscal 2015 with constant currency revenue growth in both Process Equipment Group and Batesville, and we remain within guidance we issued at the start of the year, finishing at the low end of the range as we have projected on our last call.

Looking ahead, many of our customers continue to face uncertainty without any clear signs of improvement in the near-term. Sluggish global economic growth, especially in China, has become challenging.

Lower economic growth has been particularly difficult for industries such as mining, plastics and for equipment used in the production of potash, frac sand, and other commodities. In line with our outlook for weaker demand in many of our end markets, we've taken a number of actions to reduce costs across the company.

And we continue to identify additional opportunities to operate more efficiently and enhance our position to compete in a challenging macroeconomic environment. As an update, we've nearly completed the closure of one of our manufacturing facilities in New Jersey, combining its operations with other sites that had capacity.

Additionally, we announced last month the consolidation of another manufacturing plant in Ohio that builds equipment used in mining as we respond to the shifting global demand in that industry.

We continue to evaluate our cost structure around the world with a goal of optimizing our footprint to provide the best possible service to our customers in the most cost efficient manner. With that, let me turn the call over to Kristina for a bit more detail on the quarter..

Thanks, Joe, and good morning everyone. As we reported in our filings yesterday, we finished the fourth quarter with consolidated revenue of $392 million that was down 16% from last year's record high including a 5% negative impact from currency.

The Process Equipment Group was down 24% with currency headwinds accounting for 7%, and Batesville revenue was basically flat. Adjusted EBITDA of $74 million decreased 11%, but EBITDA margin improved 120 basis points to 18.8% driven by improved profitability in the Process Equipment Group.

In fact, that improvement marks the seventh consecutive quarter with year-over-year margin expansion in the Process Equipment Group, giving us confidence that the actions we are taking to improve our business, through the application of the Hillenbrand Operating Model, are generating results.

Adjusted net income of $35 million resulted in earnings per share of $0.55 or approximately 9% below last year. Turning to the next slide, I will discuss segment performance beginning with the Process Equipment Group. The Process Equipment Group delivered $242 million of revenue in the fourth quarter, down 17% on a constant currency basis.

You will recall that last year's fourth quarter was particularly strong, benefiting from revenue from some very large projects. We did not experience a comparable volume of those large projects this year, which, in combination with a sluggish market for mining and proppants, resulted in lower revenue this quarter.

Order backlog of $459 million declined 15% from the third quarter and finished 21% below the prior year. On a constant currency basis, backlog is down $82 million or 14% below prior year. As was the case in the third quarter, order volume was up slightly compared to the prior year when viewed in constant currency.

In total, order volume for the second half of the fiscal 2015 was up 3% constant currency compared to the same period a year ago. That is not meant to imply that we are content with those results. As Joe mentioned, we are facing softness in some key markets, which may continue to affect order volume and revenue in the short-term.

As we have said previously, it is especially difficult to predict the timing of orders for large systems and equipments, which tend to have the most sizable impact on order and backlog variability. Despite the current volatility we are experiencing, our outlook for long-term demand in the key end markets we serve remains intact.

The Process Equipment Group adjusted gross margins was up 180 basis points to 35.7% primarily as a result of favorable mix for equipment and replacement parts and service. That favorable mix was also a key driver of the EBITDA margin improvement this quarter.

Moving to the Batesville business, revenue for the quarter was $150 million, up 2% from the prior year in constant currency. The increase was a result of higher volume. Batesville's adjusted gross margin of 39.4% for the quarter was up 40 basis points from last year and improved sequentially.

We continue to focus resources on becoming more efficient as we face inflationary pressures in our business. Batesville's adjusted EBITDA margin for the quarter was 24.5%, 30 basis points lower than the prior year, in part due to higher variable compensation expense in the quarter.

Moving on to the full year results, revenue of just under $1.6 billion decreased 4% with growth of 2% offset by 6% negative currency impact.

Process Equipment Group revenue increased 1% in constant currency as higher demand for equipment used to process proppants for hydraulic fracturing earlier in the year was partially offset by a decline in demand for equipment used in power and mining as well as lower volume of large projects.

Batesville's revenue growth of 2% was a result of higher volume. That volume was driven by an estimated increase in North American death. Adjusted EBITDA decreased 2% to $269 million and, as a percentage of revenue, was 16.8% or 30 basis points higher than the prior year.

That EBITDA margin improvement was driven by the Process Equipment Group as favorable mix and cost savings initiatives contribute to the growth of 220 basis points in the segment for the year. On an adjusted basis, net income decreased 0.5% to $131 million or $2.05 per share.

That reflects growth of about 7% when the prior year results are normalized to exclude $0.14 of non-recurring items. Our adjusted effective tax rate ended the year at 31.2%, 40 basis points lower than the prior year. However, slightly higher than we had planned due to a couple of discrete items. We anticipate our tax rate to be closer to 30% for 2016.

Operating cash flow of $105 million for fiscal year 2015 was lower than prior year by $75 million. You will recall that in the first quarter, we made payments related to the conclusion of litigation settlement for Batesville, and we consumed a significant amount of cash on working capital requirements in Process Equipment Group.

We expect to improve working capital in 2016 and deliver free cash flow greater than our net income. We returned over $50 million to shareholders in 2015 in the form of quarterly dividends and increased the per share amount. We also repurchased approximately 381,000 shares of our common stock at a total cost of $11 million.

In spite of the widespread impact of known headwinds including currency, volatile energy prices, sluggish end markets and slowing growth in China and other parts of the world, we finished fiscal 2015 with results that achieved the guidance we issued at the outset of the fiscal year for revenue, growth and earnings.

With that in mind, I will now turn to our outlook for the fiscal year 2016. As we look forward, we expect constant currency revenue growth of 2% to 4%. That projection assumes organic growth of flat to 2% with our acquisition of ABEL providing an incremental 2% on top of that.

Revenue from the Process Equipment Group is projected to grow 1% to 3% organically, and Batesville is expected to deliver revenue that is down 1% to 3%. Given current foreign exchange rates, management expects a 3% negative translation impact to revenue compared to 2015.

Adjusted EPS for 2016 is projected to be $2.10 to $2.25, reflecting bottom line growth of approximately 6% at the midpoint. Additionally, we are targeting another 100 basis points of EBITDA margin expansion for the Process Equipment Group in 2016.

We continue to pursue better margins across our businesses through the application of the Hillenbrand Operating Model. As I noted earlier, we have delivered strong consistent profitability improvements in the Process Equipment Group for several quarters.

The comps continue to be more challenging going forward but we are proud of our track record in this area, and we are confident that we can further expand margins over the next year. Lastly, our tax rate, as mentioned earlier, is planned to be at approximately 30%.

I would like to remind you that our two segments have different quarterly performance profiles. A significant portion of our Process Equipment Group revenue comes from large systems sales, which may have a sizable impact on revenue during quarters, when a large portion of the work is completed.

All work on these projects can span 12 months to 18 months. The revenue was not recognized evenly. Additionally, in our Process Equipment Group, the second half of the year tends to be larger than the first, and we believe this trend will continue in 2016. Batesville has a very different profile, one that is driven by the seasonality of death.

The largest quarter is generally the second quarter driven in part by the severity of the flu season. In summary, we are confident we have a solid plan to deliver on our commitments for 2016. At this time, I'll turn the call back to Joe for his concluding remarks..

Thanks, Kristina. This has been a challenging year as currency, energy price volatility and the stagnant global macroeconomic environment have created headwinds. As a result, the demand environment for capital equipment, including large systems, has remained soft, longer than we expected.

Given that, we appreciate the importance of executing on our initiatives to improve parts and service revenue and to improve operational efficiency and reduce costs, especially in the current environment. Let me say we are confident in our growth strategy and remain committed to the principles that have made Hillenbrand successful.

We delivered constant currency revenue growth and strong margin expansion in 2015, and we expect to repeat that in 2016. We will continue to apply the Hillenbrand operating model to drive profitable growth and make our businesses better.

Diverse industries we serve have attracted long-term growth prospects as they are propelled by the needs of the increasing world population, and more importantly, an expanding middle class.

While 20:16 the current environment maybe challenging, we're confident that we are on the right path to deliver sustainable value to our customers as well as our shareholders. Before I move to the Q&A portion of the call, I'd like to take a minute to recognize and thank Gus Hillenbrand for his commitment to the Hillenbrand family of businesses.

As you saw, we announced his planned retirement from the Hillenbrand board of directors on October 5, concluding more than 55 years of service to the company.

I want to thank Gus personally for his contributions to Hillenbrand, particularly his dedication to the customer and an unwavering commitment to lean, both of which are embedded in the values of our company. We all wish him the very best in his retirement. That concludes our prepared remarks.

For today's Q&A session, we're joined by Bill Canady, Senior Vice President, Industrial Products and Corporate Strategy. We're ready to take your questions.

Shaun, will you please open up the line?.

Thank you, sir. [Operator Instructions] Your first question comes from the line of Daniel Moore of CJS Securities. Your line is open..

Good morning, Joe and Kristina..

Good morning, Dan..

Good morning, Dan..

You mentioned - Joe, you talked about mining, plastics obviously, potash, maybe just to drill down a little bit more into the end markets, what you're seeing in each, and in particular, petrochem, where we are in terms of some of those larger opportunities? If they're being pushed out, why? Just a little bit more color on some of your larger verticals within Process Equipment would be helpful..

Okay. Great. Let me answer that question maybe a little bit differently, first, and then get to the end markets.

I think one of the key things to recognize as we move into 2016 and given the environment we're in, is we've seen a shift to more service revenue and expect to see more of a shift to service revenue as a percentage of our total revenue in 2016.

And so, as we've talked about on previous calls, we've been very focused on growing our service revenue, growing share in our service revenue around the world, and so, as we move in to 2016, we expect that to be a growth area for us.

And so, that's really across all of our end markets and all of our Process Equipment businesses and across all of geographies that we expect to see that growth.

And then if you move to the end markets, obviously, polyolefin projects are the larger projects that we do and we've seen some of those orders delayed and pushed out, largely as a result of oil and gas prices that we've witnessed or oil prices that have come down and the slowing economy in China.

Now, with that said, we haven't seen any projects canceled. We've just seeing some projects push out a little bit. And the other shift that's happening is as the North American shale gas projects play out, we're seeing more projects in Asia. So, we expect that business to be relatively flat on a year-over-year basis, but it comes in pretty big chunks.

So, again, we feel good about that market. It's just pushed out a little bit this last couple of quarters. From the other end markets, mining, North America is where coal power and mining business is primarily - that's been a difficult end market. Potash is around the world. The underlying dynamics of potash are pretty good.

But crop prices right now are about a five-year low, and so there hasn't been a lot of investment in fertilizer. It has to happen. And so, I think forecasts for the next two years are pretty strong. 2015 was a relatively down year on the potash side of the business.

Again, the other big driver from an end market perspective is frac sand, equipment used in frac sand. We have a really strong year in 2015. $35 million or so of revenue. That's a very cyclical market. It goes up and down quickly. We don't expect to see much revenue at all in 2016.

It may come back towards the end of the year, depending on what happens with natural gas prices and drilling well count. But that's a bit of a headwind that we'll face in 2016. On the positive side, in addition to service, processed food is a pretty good market. It's a stable market.

It's also a place that we’ve put a lot of energy the last three or four quarters from a marketing and product development perspective. We're starting to see traction there, so we expect growth in processed food as we move forward as well. So, that was a long answer to your question.

Did I - do you have any follow-up questions related to that?.

There was a lot of - obviously, a lot of ground to cover in it, so that's helpful. But I guess the follow-up would be given the decline in backlog and obviously tough comps over the next quarter or two, maybe just help us with your confidence and visibility in generating even flat to slightly positive organic growth this year.

What has to happen? What has to come back within those end markets to kind of hold serve, given it'll be a bit of a back-end loaded type year?.

Yeah. So for us to hit our numbers in 2016, we need to continue to win in service, which we fully expect to do. We need to continue to win in processed food and we've had pretty good demand for some of our machines and smaller pieces of equipment in North America.

We've gotten some benefit from the Coperion K-Tron combination, particularly leveraging the North American sales channel for - that was traditionally a K-Tron sales channel for more Coperion products. So we expect North America to be a pretty good market for us next year with individual pieces of equipment and smaller projects.

And then at the end of the day, our middle sized projects are pretty consistent with last year and we've had a relatively low bookings in large projects, as you know, the last few quarters. We expect that to turn around in the next quarter or two.

And so really, we need to book some of those larger polyolefin projects both in North America but also in Asia to have a good 2016.

If you think about 2016, we expect it to be a year that's similar in terms of revenue and order intake flow as it flows through the year on the Process Equipment side, a similar year to 2014, where we started out a little bit slow, we booked some significant projects in the second quarter, and then had a pretty good back half of the year.

So we expect a stronger second half of the year in 2016, and the year will look a lot like 2014 looked..

Okay. And lastly and then I'll jump back in queue. Can you give us, I know you mentioned 2% contribution from ABEL.

Give us maybe more color on the EBITDA and adjusted EPS contributions that you expect from that acquisition?.

Sure. Let me turn that to - let Kristina answer that question related to ABEL..

So, Dan, ABEL from a revenue perspective, we're thinking about between $35 million to $40 million, which gets that 2%. If we think about their EBITDA, it is about in the high-20%s, similar to our Rotex and TerraSource business and really solid gross margin. So, as you can see in the guidance walk, we did guide accretion of $0.01 to $0.03 with ABEL..

Okay. Thank you again..

Thanks, Dan..

Your next question comes from the line of John Franzreb from Sidoti. Your line is open..

Good morning, everybody..

Good morning, John..

Good morning, John..

Can you just talk a little bit about the gross margin profile in the quarter just ended, especially in Process, how much was it impacted by the mix? You talked about having more service side - on the revenue profile, and how much was it impacted by the benefits from previous restructurings?.

So it was definitely a combination. And I would add one more category. So we had, from a mix perspective, we saw a shift to more service revenue as a mix of total revenue in the second half of the year, which benefits us. We have taken a lot of cost-out activities over the last six or seven quarters.

They continue to flow through, and we continue to see the benefits of those cost-out activities around the company. And then I think the third category is just improved processes using our lean capabilities. Just an example of that, this year, we had a pretty significant procurement initiative in part of our Coperion business.

Essentially what it has enabled to do was go out and procure earlier in the process. We are able to see significant savings by just improving that procurement process. So, it had improvements there. We've improved on time delivery in certain parts of the business to drive margin.

And then as I've mentioned, the cost-out activity, not just on the operational side that hit the gross margin line, but also on the operating expense line as we continue to look for synergies as we combine some sales offices, as we put Coperion and K-Tron together, we continue to find synergies on the operating expense side of that business as well.

So, it's been really a combination of mix and price, some lean projects, sourcing projects that we're constantly doing to drive costs out, as well as one-time structural activities that we'll continue from on an ongoing basis..

Could you quantify what the benefits were for each of those three buckets?.

We don't break those out in detail and talk about those publicly. And so, it's a - we have a target of 100 basis points EBITDA growth in the Process Equipment Group. I will say this year, we exceeded that target.

I'd say the part that we exceeded that target was largely around mix, again focusing on our more profitable pieces of the business, but we feel really good about the underlying structural changes and the ongoing cost-out that we're making. But given the big increases in EBITDA margin, there was - above what we expected, a chunk of that was mix..

So, Joe, when you think about 2016, is mix going to be the primary driver, firstly? And secondly, do you still expect that 100 basis points in EBITDA improvement in 2016 considering that you've overshot that target in 2015?.

So, yes. We believe that we'll get the 100 basis points in 2016. In fact, beating it and really get 200 basis points in 2015 gives us more confidence as we go into 2016 rather than less confidence. So we do expect to continue to get the benefits of the activities that we've undertaken as we go into 2016. We will also see the benefit of mix in 2016.

So as I mentioned earlier, we'll see higher - as our total revenue, a higher percentage for our total revenue coming from service and also from some of our equipment and component sales of smaller systems, and those carry higher margins than the really large projects. So we will get the benefit of mix in 2016 as well..

Okay.

And any particular reason why you expect the Batesville business to be down in that range in 2016? Is there something that you're seeing out there in the market that would suggest that?.

Yes. So we've been in the Batesville business for long time and there's this pretty predictable market sizing based on the number of demographics and number of people who die, and then you take away the number of people who chose cremation, which is a relatively predictable number, that follows the certain pattern, and then you get burials.

The one thing that kind of a wildcard is the flu season, and we had a very strong flu season. There was a lot of mortalities associated with this year's flu and it's not typical to see year-over-year severe flu seasons.

And so, we just generally, when there's a big flu season, expect to have a smaller burial market the next year, and as we set guidance, we also go out, we check with the CDC and follow the website to see how the flu looks as it's moving around the world.

It appears at this point that there's a pretty good match with the immunization and the vaccine and the virus, and so, again, we're expecting a return to a more normal burial casket market this year..

Okay. And one - go ahead..

But there's nothing structurally - sorry, there's nothing structurally different about the business or the market or our performance in the market. We expect to continue to have a strong year in terms of relative market share, et cetera..

Right..

It's just really the overall demand..

It's just tough flu season comp. Got it..

Yeah..

And one last question, could you just give me an estimate for our depreciation, amortization for 2016 and the CapEx number?.

Yeah. So capital will be similar to this year, John. We had this year about a little over $30 million. So capital should be pretty similar. As for next year, depreciation and amortization, we actually started to break out amortization in our K on a go forward basis, so you'll have the ability to see that.

This year, it was about $54 million, given that we have the acquisition of ABEL, you're going to see that go up slightly..

Okay. Thank you very much..

Thanks, John..

Your next question comes from the line of Liam Burke from Wunderlich. Your line is open..

Thank you. Good morning, Joe, good morning, Kristina..

Good morning, Liam.

Good morning, Liam.

Joe, could you give us a little color on how you see ABEL business sitting in either with PEG or as a third division of the business?.

Sure. And just to be clear, definitely it's fitting in to our Process Equipment Group right now. That business is actually being - it's part of Bill Canady's group, and we have Bill on the call today for specifically the ABEL question. So, I'll let Bill talk about that, and how ABEL fits into the Process Equipment Group..

Sure. Thanks, Joe. When we look at the current portfolio that we have in the PEG group, it works very closely with our TerraSource and our Rotex brands. Particularly on the TerraSource side, they go after similar customers, have similar channels of the market around the mining and other applications. So we see the verticals being well-aligned with that.

And then as we look out over time, we want to continue building out around this flow control platform. We like the space, it's highly engineered, there are mission-critical parts, they have a strong aftermarket. So it's a thing that we'd like, and that we continue to driving our own businesses as well as this one brings it to us.

So, we like the way it fits..

Yeah. And I would just add we expect to continue to grow this platform and this part of our business again. We like the characteristics of the business. We have a great global footprint that we can fit it into these kinds of businesses around the world.

And as Bill said, they fit pretty nicely not only with our footprint but some of the end markets that we serve..

Great. Kristina, I know this is probably a little bit of nitpicking, but the payables account on the working capital was down significantly.

Is there some reason for that?.

Yeah. So, as we look at the working capital, it's primarily driven - the payables is primarily driven by POC accounting and Coperion. So, as a result, the payables have declined. You're going to see that continue to happen as we have the large jobs come through.

So it's difficult to see the actual ageing of the payables because you do have that POC piece coming through. Now, with that being said, we were very disappointed in working capital, with our performance in working capital this year.

We have to do some blocking and tackling to make sure that on a go-forward basis, that we have our working capital much more efficient. And so what we've said actually earlier today was that for 2016 we're targeting free cash flow greater than net income. So, slightly lower this year.

We had a tough year with not just Coperion but also the Batesville settlement, litigation settlement..

Thank you, Kristina..

Your next question comes from the line of Gary Farber from the C.L. King. Your line is open..

Yeah. Good morning. Just a couple of questions.

Can you talk about what the current quoting activity looks like for these large sort of petrochem projects?.

Sure. The quoting activity is pretty stable. So, we haven't seen - over the last quarter or so, we haven't seen any new projects in North America come on to the radar screen. Where we have seen new projects show up is in Southeast Asia.

So we're seeing, as I've mentioned earlier, a shift from a heavy North American focus on the big projects more towards Asia. Again, that's driven by low oil prices as the feedstock. So, as oil prices remain low, it's a more viable feedstock for plastics. And China, in particular, still imports a lot of plastics.

And so, they look to continue to build capacity not just in China but around China and Asia to supply that region of the world with plastics. So, we're seeing - there's been pretty stable pipeline. And again, the shift has moved more to the Middle East than to Asia, where it's oil-based feedstock..

And when I look at the midpoint of your EPS guidance, is there any assumption for how quoting activity will play out in the second half of the year?.

There is an assumption for how quote activity or the pipeline will play out in the second half of the year. So, the bigger, I think, driver based on guidance for 2016 is really the projects that are already out there that we expect to be awarded particularly in the second - our second fiscal quarter, so surely after the New Year.

But in our first and second - over the next couple of quarters, there will be a number of projects awarded. And again, I think this year will look similar to 2014 in terms of the percentage of business by quarter.

And order intake will look in a - look at similar way, which is - we have pretty strong order intake in the second and third quarter of 2014. That's the kind of theme we expect again this year..

Great.

And those would be - the ones you think will start to come in, those are, sort of, larger projects or sort of a mid-sized projects?.

Those are some of the larger projects that are out there..

Right.

And then also, can you speak to if those things don't materialize the way you think, just opportunities - you already have high margins at Batesville and you already operate very efficiently as far as your plans but are there other opportunities to take costs out of that business, if the other business doesn't materialize as you think?.

On the Batesville side of the business, we worked very hard year after year after year to take cost out to offset inflation.

We think, because you can predict that Batesville business or we can predict the Batesville business over the long run, and we have very thoughtful plans about capacity both in our manufacturing and distribution system in how we want to match that with what we expect from the demand side and our challenge is - our race is to make structural changes to get costs out in addition to the day-to-day activities that we do.

So we're always preparing those things. When we have something that we're prepared to announce, we would certainly announce - certainly make that announcement but there are opportunities to continue to take cost out of the Batesville business.

It's just a mature business and it's a little bit longer timeframe, but absolutely, we see opportunities to do that..

Can you also speak to on the service revenue piece, sort of give some stance of the magnitude of revenue growth this past year and sort of back to your guidance, sort of how you think about the type of revenue growth you need to see in fiscal 2016?.

Sure. We don't break the service revenue growth out separately. But I would tell you, if you look at our overall growth in the Process Equipment Group this year, the revenue growth was significantly better in service than the rest of the business.

And so we target sort of long-term growth of that 4% to 6% in the Process Equipment Group on the service side of the business. We've been achieving or exceeding that kind of growth on the service side of the business this past year and we expect that to continue as we move into 2016. And again, it's a combination of a couple of things.

But at the end of the day, it's really a focus on that part of the business, it's dedicated business unit, dedicated business leaders who have responsibility for the full P&L there and trying to grow share around the world with improved process and improved focus on that part of the business..

But would you be assuming that your - even if it's not a huge uptick, would you be assuming that your revenue growth improves in an absolute number in 2016 versus 2015 as you're growing faster?.

Yes. In an absolute number, yes, for sure. We would - we expect our service business to grow on an absolute basis in 2016..

Okay. And then just two last ones.

Just can you update us on your thoughts on the acquisition market, and how you're thinking about it headed into sort of an environment where things are a little bit weaker?.

Yeah. So we've been very active with regard to acquisitions. As you know, that's part of our strategies to continue to acquire business, good businesses that we can make better. I think the M&A environment right now is really robust. I'm not sure that we've seen a huge impact yet, based on the any slowing of the global economy.

I think prices are still relatively high, but they're not getting higher. So, we're being prudent and disciplined, but we see a pretty active acquisition market. We've been pretty focused in the types of end markets we're looking at.

And so, we think it's a pretty good acquisition market right now, and we have management bandwidth and financial bandwidth, so we are active..

And would you say most of the deals, the majority of the deals are ones that are sort of brought to you or they're ones that you're sort of sourcing yourself?.

We look at three types of deals. The first type typically are smaller ones. It's a bolt-on or an add-on acquisition that would go right into one of the businesses we own. In most cases, those deals, the ideas come from inside the business, and it's part of their long-term strategy. Second type of deal we look at are adjacencies.

The ABEL acquisition would fit that as adjacent, so some of our businesses we see the same customers, we see the same end markets. And so, those are a combination of internal ideas, but also with our external partners. And then finally, we look at new platforms. These would be typically larger businesses that would be standalones.

Those are typically brought - those ideas are typically brought to us from outside sources. We've been more focused as we've communicated the last, I think, a couple of calls, more focused on add-on acquisitions and adjacencies.

So, we've been spending a lot of time working with our internal teams to think about how acquisitions will impact our portfolio and the strategies of our businesses going forward..

And then just lastly on China, can you quantify at least on a percentage of revenue basis, how big China is as a percentage of the overall Process business?.

Yes. So let me just think about - let me just frame that one step higher first. So we think about the Americas, Europe and the Middle East and then Asia. We have seen a shift from Asia more towards the Americas, North America over the last few years.

Again, that's driven by the big projects, the larger projects that have moved because of the shale gas feedstock. As we move forward, we expect that trend to moderate a little bit as we go into 2016, so we expect pretty stable business in Asia.

It's about a quarter of our business right now in the Process Equipment Group, and China would probably be about half of that quarter. So, it's probably, it's about 25% as part of the Process Equipment Group, and then China is probably about half of that. So thinking that's 12% to 13% range for China..

And just as a follow-up then, can you also give us a similar commentary? You said Asia, I think, is stable.

Can you comment on how you think about North America and Europe for Process?.

Yeah. So, I just want to be clear. I was talking about the mix of our revenue, where it would be moving and a lot of that is driven both by - while it's a relatively smaller base, it's driven by penetrating the Asian market as well as some of the bigger projects. In 2016, as in 2015, North America was pretty strong for us.

And so we had growth in North America and North America became a larger part of our overall revenue. Again, we expect that to continue into 2016, but to moderate a little bit as we see some of those larger projects shift to Asia. And Europe, we're just really treading water in Europe. I mean - but it's probably not a good word, treading water.

But we're working to grow in Europe, but just the global economy or the local - the regional economy in Europe is just relatively flattish and has been that way for a few years..

And if you're expecting positive trends into North America, has that driven those more so by the service side than sort of the new projects side?.

I think it's driven by two big things. One is, without a question, service - we had a really good service growth in North America last year. We expect that to continue. We continue to see that as we talk to our businesses.

The second place that we're seen growth is - as the Coperion, K-Tron companies have come together, we had that very strong North American sales channel that had historically only carry K-Tron equipment. So we're seeing growth in processed food with an expanded product line as we bring K-Tron and Coperion together.

So certain end markets in North America are growing. We've seen the compounding through the engineered plastics business and the material handling that goes around that. These tend to be smaller systems. We've seen that growing in North America. And so North America was strong for us in 2015. We expect that to continue as we move into 2016..

Okay. Thanks so much for your answers..

Sure. [Operator Instructions].

Your next question comes from the line of Daniel Moore from CJS Securities. Your line is open..

Thank you again. Just wanted to follow up on the acquisition environment and maybe more so on the strategy. You mentioned building out flow control.

Is that a particular area of focus, flushing that out now that you've gained an entry into that vertical with ABEL? And would you be looking for a larger deal, similar size? And how do you think about multiples - fairly healthy multiple to get in with ABEL? Are you comfortable paying those similar kind of 11 times, 12 times multiples going forward? Do you see maybe more attractive valuation for smaller deals?.

Okay. I think I heard three questions there. One is flow control, will we continue to do business and go look at acquisitions there. Two was what that structure might look like and what those companies might look like. And then there was the multiple kind of price question. So, let me start with the first part.

The ABEL acquisition is since - at least since I've been the CEO, the first acquisition where we identified a clear space in advance and said we scanned the horizon, we looked at a bunch of different spaces. And we said, we really like the flow control space.

It has the characteristics - the companies have the characteristics that we're looking for, has decent growth characteristics, relatively fragmented, niche applications engineering, right, really fit pretty well with the kinds of businesses that we want to build on the Process Equipment side of the business.

And so once we made that determination, we went out and worked with our partners to find good businesses to look at. So, ABEL is the - it's what we hope to be the first acquisition in that space. These are niche businesses.

So, there tend to be lot of businesses out there that are in this $30 million, $40 million, $60 million, $70 million of revenue range. They're niche. They tend to have pretty high margins, which is one of the reasons the multiples are a bit higher.

We would like to, quite frankly, to do a little bit larger acquisition in this space, an acquisition that would be to $200 million to $300 million of acquisition price would be great for us. You can't always pick and choose what businesses come at you but - so, we do expect to buy businesses similar to ABEL. We'd like them to be a little bit bigger.

Again, the way we benefit and the way we will make a business like ABEL, which is a great business, better is to fold it into our global footprint, right.

These are operating models to make operational improvements where we can to fold it into our global footprint, share procurement sourcing, manufacturing, sales channel access as we take a company that might be a bit regional either in Europe or the U.S. and expand it around the world. So that's how we think about building out the platform.

And then the multiple is an interesting question. Everybody has a different view on what a good multiple is or what a full price is. This is a - ABEL is a great company, it's been around a long time. It was owned by Roper, so there's a lot - for a non-U.S. company. There's not as much risk in terms of the way it operates in terms of dealing with the U.S.

public company, Foreign Corrupt Practices Act, all those kinds of things, good controls in place. So that's one benefit. Two is, it's in a space that's growing, that's another benefit. And three is the margins are really, EBITDA margins in the mid to high 20%s.

Those are the kinds of businesses that demand higher multiples, but they're good businesses which is why they get the higher multiple. So we don't think that ABEL was expensive. We don't think it was inexpensive. We think we paid a good price for it and we'll get a good return for our shareholders, which is the key metric we use.

So we don't focus so much on the multiple as we do on the return and make sure that we can beat our hurdle rate for the project, so that the shareholder gets a good return..

Okay. Thank you again..

Did that help? I hope that helped..

It does. Thank you..

All right. Good..

Your next question comes from the line of John Franzreb from Sidoti. Your line is open..

Yeah. Just a couple of quick follow-ups. Joe, you mentioned the expectation of having large project work coming in the second half of the year.

Could you talk a little bit about the pricing environment in regards to those large projects? Are you seeing any push back on pricing?.

So, yeah, it's a more competitive market. I think as the jobs move more to Asia, that's just typically more difficult pricing environment. But from a - for most U.S. companies, you think about currency issues around pricing, and the thing to remember about our large project is most of that work is done out of Germany, most of our cost base is in euros.

And so, our cost base remains pretty competitive compared to the rest of the world because most of our cost base is euros. Now, it's hard when we translate it back to dollars, but from a competitive perspective, we think pricing - we haven't seen a huge shift in the pricing environment out there.

And I think the weakness of the euro or the strength of the dollar, either, however you look at it, but the euro is a pretty competitive currency right now. So we don't see huge pricing issues in the market right now..

Perfect.

And regarding commodity cost, how is that helping or hurting - probably helping the Batesville business?.

Yeah. Let me ask Kristina to answer that question..

Yeah. So, John, for the quarter, as an example, we did have some favorability in our commodities primarily driven by fuel, but that was still offset by some unfavorable steel and wood. So what we anticipate going forward is to see that favorability in fuel for the next couple of quarters, and then hopefully have steel turn around on us..

Okay. Thank you very much..

Thanks, John..

There are no further questions at this time. Mr. Raver, I turn the call back to you..

All right. Thank you, Shaun. And once again, I'd like to thank everyone for participating in the call today. We look forward to talking to you again when we report our first quarter results early next year. Thanks everyone, and have a good day..

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