Joe Raver - President and CEO Kristina Cerniglia - CFO Kim Ryan - President, Coperion.

Liam Burke - Wunderlich Securities Robert Majek - CJS Securities John Franzeb - Sidoti & Company Spencer Joyce - JJB Hilliard Lyons & Associates, LLC *.

Good morning, everyone, and welcome to Hillenbrand’s Earnings Teleconference for the First Quarter of Fiscal 2017. A replay of this call will be available until midnight Eastern Time February 16, 2017, by dialing 1-800-585-8367 toll free in the United States and Canada, or 416-621-4642 internationally, and using the conference ID number, 57047494.

This webcast will be archived on the Company’s Web site at http://ir.hillenbrand.com through March 1, 2017. If you ask a question during today’s call, it will be included in any future use of this recording. Also note that any recording, transcript or other transmission of the text or audio is not permitted without Hillenbrand’s written consent.

At this time, it’s my pleasure to turn the conference over to Joe Raver, President and Chief Executive Officer of Hillenbrand. Mr. Raver, please go ahead..

Thank you, Operator. Good morning and thanks for joining us on our first quarter fiscal year 2017 earnings call. Joining me today in the call will be Kristina Cerniglia, our Chief Financial Officer. For the Q&A portion of the call, we will be joined by Kim Ryan, President of Coperion.

During the call, we’ll be referencing a slide presentation, which can be found on our Web site. Today, I’ll discuss our first quarter highlights, as well as how we’re progressing on our strategy.

Kristina will then present additional detail on the Company’s financial performance and discuss our outlook for the rest of the -- of fiscal 2017, before we open up the call for Q&A.

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

Also, during the call, we will be discussing certain non-GAAP operating performance measures. I encourage you to take a look at our 10-K and 10-Q, which can be found on our Web site for a deeper discussion of forward-looking statements and the risk factors that could impact our actual results.

For more information on our use of non-GAAP operating measures and the reconciliation to GAAP financial measures, please refer to our 10-Q and the slides presented with this call. With that, I’d like to begin with a brief reminder of our strategy.

As you know our vision is to develop Hillenbrand into a world-class global diversified industrial company. We seek to leverage our strong financial foundation and the Hillenbrand operating model to deliver sustainable profit growth, revenue expansion and free cash flow across our business.

We reinvest both organically and in acquisitions to build leadership positions in key markets to drive profitable growth and create value for our shareholders. Hillenbrand operating model is central to our vision of transforming Hillenbrand into a world-class company.

It gives us a framework and process that we believe helps produce consistent and sustainable results across our business. Foundation is in the principles that have driven Hillenbrand since our inception.

Hillenbrand has grown and evolved, we've enhanced our operating model to strengthen its application to our business and to bring focus to the critical few capabilities and initiatives with the most potential for creating sustainable value for our shareholders. With that backdrop, let me move on to a high-level summary of first quarter performance.

Our first quarter results were largely in line with internal expectations. During the quarter, we saw sustained momentum from our plastics business. This is a continuation of the solid performance we saw last quarter.

We’ve been successful in winning a number of very large complex projects, which our design and engineering expertise have been key differentiators.

We’ve a strong track record of delivering innovative and high quality systems for these projects, which has helped us become a key partner to our largest petrochemical customers with the most demanding applications. These projects contributed to revenue growth in the quarter, and they also provided some growth in the backlog over the prior year.

Our order pipeline is healthy. We are seeing continued strength in the U.S., along with additional opportunities in the Middle East and Asia for large polyolefin projects. Now let me comment on some of the other markets served by our process equipment group. Most of these markets appear to have stabilized over the past few quarters.

However, persistently low commodity prices continue to weigh on demand for parts and capital in many of our core industrial end markets. While the relative stability is encouraging, we still believe there's overcapacity in many of these markets, and we're unlikely to see any meaningful growth in this fiscal year.

Batesville’s revenue was down for the quarter on lower burial sales, but the business continues to find ways to deliver strong margins and cash flow. We’ve used the Hillenbrand operating model to bring focus to areas where we can create the most value for our customers.

For example, Batesville is using Voice of the Customer Research to help bring more innovative products to market and to improve quality and service, which are key differentiators for us. In addition, we’re investing in technology to better showcase our products, drive greater efficiency for the funeral homes that partner with Batesville.

And as always, we're also constantly becoming more efficient by applying lean across the entire Batesville value chain. In total, we finished the first quarter with modest revenue growth, driven by the large plastics projects, as well as the addition of Red Valve to our process equipment group.

We also grew the bottom line with GAAP earnings per share of $0.34 and adjusted earnings per share of $0.42, which is up 2% from the prior year. Over the past year, we’ve taken actions across our Company to simplify our business and reduce costs, protect profitability in the midst of challenging end markets.

We continue to execute on previously announced restructuring actions, which are on track to deliver targeted savings this fiscal year. Overall, we’re pleased with the way our businesses have executed, given the challenging market conditions we faced.

Before turning the call over to Kristina, I’d like to provide a brief update on our most recent acquisitions, ABEL and Red Valve. These flow control businesses have now been a part of Hillenbrand for a full-year and are fully integrated in all back-office functions.

We completed the consolidation of a small production facility, which went very well and we’re now collaborating on opportunities to leverage our global sales channels, particularly in North America to accelerate growth. We really like the diversification and growth potential of these businesses have added to our portfolio.

They’re both strong businesses with terrific value proposition, solid margin. As we look forward, M&A remains a key component of our profitable growth strategy, with an emphasis on building leadership positions in our current industrial businesses.

We will continue to follow a disciplined approach to ensure that when we execute our next acquisition, it will be a good fit strategically for Hillenbrand and a good investment for our shareholders. Finally, we continue to monitor the current political landscape closely.

It's still too early to predict how the new administration is likely to affect our Company in the coming year, but we’re working hard to understand how potential policy changes could affect our business. With that, let me turn the call over to Kristina for a bit more detail on the financial results for the quarter..

Thanks, Joe, and good morning, everyone. As we reported yesterday, revenue was $356 million in the first quarter. That is an increase of 1% over last year driven by Red Valve and large projects in our plastics business, offset by Batesville, other industrial market and an unfavorable currency impact of 1%.

Process equipment group revenue was up 4% and Batesville was down 2%. Organically revenue was down 2% as we experienced lower volume in both segments. GAAP net income of $22 million was 9% higher than the prior year, resulting in earnings per share of $0.34.

Adjusted net income of $27 million was 2% higher than prior year resulting in adjusted earnings per share of $0.42. Adjusted EBITDA of $56 million was down 2% and EBITDA margin declined 60 basis points to 15.8%. Our adjusted effective tax rate for the quarter was 26.5%, 400 basis points lower than prior year.

The decrease in the rate was primarily a result of a discrete tax benefit on share-based compensation. It is not easy to predict the impact of discrete items, but we now expect our adjusted effective tax rate to be approximately 30% for the full-year.

Excluding the discrete item, we expect the rate to be in line with our previously communicated guidance of 31%. Our operating cash flow performance was again solid this quarter and we are pleased with our continued ability to generate cash.

You will recall from our last call that we’ve leveraged our strong cash flow to make an $80 million contribution to our U.S pension fund at the beginning of the first quarter. We expect that contribution to be neutral to earnings this year, but to provide a sustained reduction to future pension expenses.

We had operating cash out flow of $49 million in the quarter compared to $36 million of cash generated in the prior year, with the pension contribution driving the majority of the difference. Excluding the pension contribution, we generated $23 million of operating cash flow in the quarter.

In addition to the pension payment, we also returned $13 million to our shareholders in the form of cash dividend and we did not repurchase any shares of common stock during the quarter. Turning to the next slide, let me cover segment performance beginning with the Process Equipment Group.

Process Equipment Group revenue of $222 million in the quarter was up 4%. Organically, revenue was down 1% or flat excluding currency headwinds. As Joe noted, our plastics business remained a bright spot through the first quarter, as we had momentum coming out of last year and that continued to be a source of growth.

Other industrial market remains sluggish and were largely flat or slightly down year-over-year. On a positive note, order backlog grew 4% sequentially to $520 million, an increase of 3% compared to the prior year. Again, plastics projects drove most of the increase.

Process Equipment Group adjusted EBITDA margin of 14.8% was down 60 basis points from last year. The type of new projects we're seeing include large compounding and extrusion systems that tend to have slightly lower margins compared to the smaller equipment we sell into other industrial market, which are currently down.

We expect to continue to see some of that mix pressure over the next few quarters as a number of those large projects flow through. While mix is down, it was partially offset by the work we are doing with the Hillenbrand operating model to drive strategic pricing and productivity initiatives and to continue to execute on our restructuring actions.

Additionally, we are making targeted investments aligned with our profitable growth strategy, which we expect to contribute to future margin expansion. Moving to the Batesville business. Revenue for the quarter was $135 million, which was down 2% from last year.

The decrease was driven by lower burial sales as a result of the market, as well as the application of our operating model which drove intentional reductions and less profitable product lines.

Adjusted EBITDA margin of 23% was flat compared to the prior year, as the lower burial sales were offset by savings related to restructuring actions taken in 2016, as well as ongoing productivity initiatives across the business.

The Batesville team continually identifies opportunities to drive cash generation and hold costs and check leveraging their lean expertise as part of the Hillenbrand operating model to protect the profitability of the business and their position as a market leader. With that, let me turn to our guidance for fiscal 2017.

We are reaffirming our guidance for top line growth as well as earnings for the year. As a reminder, we expected consolidated revenue growth of 1% to 3%. Revenue from Process Equipment Group is projected to grow 3% to 5% with growth being driven by continued strength in large plastics projects, some of which are in our current backlog.

We expect capital investment in the other industrial markets we serve across the Process Equipment Group to remain relatively stable with demand that is flat or slightly lower year-over-year. Batesville is expected to deliver revenue that is down 1% to 3% in line with our expected annual decline in burial volume.

We expect slightly lower margins as a result of lower volume, as well as commodity cost inflation offsetting the savings from last year's restructuring actions. We are targeting the midpoint of our guidance range of 30 to 88 basis points of EBITDA margin expansion in the Process Equipment Group this year.

We expect growth to be driven by pricing and productivity initiatives, as well as savings from prior year restructuring activities. We expect those gains to be partially offset by mix, which should be more heavily weighted towards large systems projects.

GAAP EPS for 2017 is projected to be a $1.80 to $1.95, and adjusted EPS for 2017 is projected to be a $1.95 to $2.10. We also remain focused on driving strong cash flow performance. Excluding the impact of the one-time pension funding, we expect to deliver free cash flow that is greater than our net income.

At this time, I will turn the call back to Joe, for his concluding remarks..

Thanks, Kristina. This year started consistent with our expectations, with strength in large projects in our plastic -- plastics business and relative stability across other industrial end markets. We expect those trends to continue over the next few quarters. We are pleased that the results we’re seeing from actions we've taken across the business.

Over the past year, we’ve reduced costs and improved our ability to execute on strategic initiatives.

As always, we are leveraging the Hillenbrand operating model to make improvements in our business that are moving us closer to our objective of establishing Hillenbrand as a world-class diversified industrial company in the eyes of our customers, our employees, and our shareholders. That concludes our prepared remarks.

For today’s Q&A session, we’re joined by Kim Ryan, President of Coperion. We are ready to take your questions. Operator, would you please open the lines..

Certainly. [Operator Instructions] Your first question comes from the line of Liam Burke from Wunderlich. Your line is open..

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

Hi, Liam..

Hi, Liam..

Joe, on the polymer business or the systems business, you’ve got a design and engineering expertise. These are high-end systems.

Is this an opportunity for you to take market share globally, since typically we think about the business has been sort of distributed equally among competitors?.

Yes. You know, that's a great question. We -- while we have two really large competitors on one part of the business, the extrusion part of the business and then one really large competitor on the material handling side of the business, we each have our own kind of little niches in things that we do, maybe a little bit better than the others.

So little bit of it depends on where in the world the project is, specifically what the customer situation is and who can be the most created in terms of solving the problem. We feel, particularly in the last couple of years, we've done well in terms of winning our fair share of projects.

And part of that has been we had a significant chunk of those projects in North America where we have had a significant presence for longtime, maybe a stronger presence in some of our competitors. So we don't -- these projects are big.

It's hard to discern market share really easily except for over a long period of time, but I will just say that we feel like we've done very well in terms of maintaining or enhancing our market position on these large projects..

Okay. Thank you. And just touching on aftermarket sales growth, you had an organizational initiative to grow that business.

How do you feel you’re progressing there? I know you saw growth this quarter, but are you where you need to be?.

Well, we’re never satisfied. But I think we feel very good about our ability to grow the parts and services business not just in the large polyolefin projects and in the plastics business, but also across all of our businesses. As you recall, we had an exceptionally strong 2016.

We won a number of large projects in 2016 that come along every once in a while in the polyolefin side. Profitability was up. We expect that to have a strong '17 is well, it's a little bit more challenging on a year-over-year comparison. But we’ve got leaders identified in all those businesses.

We work very hard in terms of making sure we have the right products in the right places to serve our customers, as well as we can. We continue to use the Hillenbrand operating model to segment the business, identify those places and those products where we can get competitive advantage and win more market share.

So, we feel really good about that part of the business, expect to continue success there. As you know, Liam, this is not one of those things that you win a big project necessarily, you see this big bang. It's nice, steady, incremental performance.

We believe we've been winning market share across our businesses for the last couple of years and we expect to continue to do that as we go forward..

Great. Thank you, Joe..

And Liam, this is ….

Sorry, Kristina..

I was just going to add to that is, we do continue to see our parts and service revenue grow at a faster rate than our capital equipment..

Great. Thank you..

Thanks..

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

Good morning. This is actually Robert Majek filling in for Dan this morning..

Good morning..

Hi, Robert..

What drove the modest uptick in the PEG backlog?.

If we look at the PEG backlog, it was primarily driven by the large projects in our plastics business..

Got it.

And any signs of life in frac sand, energy or potash?.

This is Joe. So let me just take those one at a time. I think on the potash side, you can go out sort of Google potash prices and you can see there its five-year lows. So the whole fertilizer arena is still pretty depressed and not a lot of investment on the fertilizer side. So that’s potash and fertilizer.

On frac sand, we're hearing a lot about natural gas prices are up, rig counts are up, we’re hearing a lot about increased use of sand. I will tell you that there's overcapacity in that market and we can -- based on spare parts usage etcetera, we can sort of try to estimate capacity utilization in the market.

So we’ve a bit of a way to go to see increase -- increases in utilization that will drive capital demand. We’re seeing a little bit of an uptick in parts right now, replacement parts, wear parts. But we're hearing quite a bit of noise, but we haven't really seen it show up yet in orders.

And so there is a little bit of a lag between when demand increases and we will start to see any appreciable increase in orders. On the energy side, on the coal power side, for example, we had a little spike in December where we saw with some cold weather and natural gas prices higher, a little bit more coal burned.

We are expecting really very, very modest growth or flat in that on a year-over-year basis after a couple of years of coal being down.

So, generally those markets, I mean, the way we characterize those markets is they continue to be flat, some even slightly down, and so we don't expect to see any appreciable increase that will drive particularly our capital business over the next couple of quarters.

Does that make sense?.

Yes, thank you. That was very helpful.

And just lastly from me, what are your expectations for fiscal '17 free cash flow ex the pension contribution?.

So we generally say that free cash flow is going to be greater than net income, excluding the pension contribution..

Thank you..

Thanks..

[Operator Instructions] Your next question comes from the line of John Franzeb from Sidoti. Your line is open..

Good morning, everyone. Maybe we can just switchover ….

Hi, John..

… to Batesville for a second. It seems like the flu season was much weaker than a year-ago.

How does it compare versus your expectations and relative to your expectations for hitting the targets you set for the full-year?.

John, we saw a pretty big flu -- a really big flu season a couple of years ago, not much of a flu season last year. As we set guidance, we can't really tell, but we -- you start to get early indications of whether the vaccine is going to be a match. So we expect -- I think we guided to down 1% to 3% on the Batesville side.

We're experiencing really what we expected, which is a relatively minor or flu season with very little mortality associated with it. Cremation continues to grow and so we think that down 1% to 3% is probably a good estimate for the year and we experience that in the first quarter..

Okay. Just sticking with Batesville commodity costs, can you kind of review the impact of commodity costs on Batesville? I believe you had some favorable headwinds in the second half of last fiscal year.

Is it starting to impact you at all or can you just kind of walk through us, how that’s playing out?.

Sure. So I would say, for the quarter, we did see about a $1.5 million worth of pressure on the commodities line in Batesville, but that was offset by the savings as a result of our restructuring actions that we took last year and the continued productivity initiatives that are going on in that business.

This quarter, if you break it down between really steel, fuel, and wood, I would say that fuel is the largest driver of the year-over-year increase in commodities and then followed by steel.

As we go forward, however, we can't really predict what fuel is going to do, but we do know kind of where our steel is going to be, because we lock into these long-term contracts. So we're expecting some commodity pressure in steel starting in the second quarter, because as you mentioned last year we had some favorability.

We saw a nice favorability in steel starting in the second quarter and the third quarter. So you’re going to see that pressure hit us in the second and third quarter..

Got it. And on the M&A front, Joe, you mentioned that ABEL and Red Valve have been fully consolidated. Can you talk a little bit about the opportunity pipeline as far as acquisitions? What kind of businesses you’re looking at? Do you expect to close something within this fiscal year? Any kind of color would be appreciated..

Sure. So let me just take kind of a big step back, a couple of things. One is, when we're thinking about M&A, as we went through our strategy process this past fiscal year, we're very focused on generating profitable growth and part of that profitable growth strategy M&A is one way we get there.

So one thing is we will be focused and had been focused on businesses that are closest -- that are closer to our current businesses, so they’re not too far away from our current businesses.

So these will be tuck-in acquisition or adjacent acquisitions that are relatively near to our current businesses -- of course the process equipment side of the business. So with that said, we have a very active program. We continue to have a very active pipeline. We don't really talk about when we expect a deal if or when we expect a deal to close.

I will just say to you that we continue to be very active. I believe that we're very focused in terms of the kinds of businesses that we're looking at to build our growth strategy. And then, I guess, the last thing I would say is, there is -- M&A pipeline is or activity is full, their business is out there.

I would say multiples continue to be relatively high in some of those spaces that we’re looking at, but it's an active market, we're active, we feel like we’re really focused and understand where we want to go strategically.

But as you know with given relatively full multiples, we need to be very disciplined and make sure that -- any acquisition fits strategically with our business, but that we also get a great return on it, so that is good for shareholders. So, we continue to be active. We think we’re focused and probably that's all I would comment at this point..

Okay. And then to some -- on process, you mentioned earlier the pricing initiatives.

Can you just kind of review how successfully you’ve been in implementing them in this environment? Just walk us through where you expect to go on the pricing initiatives front?.

Sure. When we talk about pricing initiatives, we're really talking about strategic pricing. Part of our operating model is we were constantly segmenting our business to understand where we create the most value for our customers. And that’s typically where we’ve the highest margins.

So we’re always looking to understand strategically how we can better price. Sometimes that means the ability to take price up, because we create lots of value, sometimes that means in some cases, for example, in some parts categories we're taking prices down to drive more volume. So we have programs really driven across our businesses.

We've been doing training, so we’ve been doing sales and pricing training for all of our businesses, particularly, on the Process Equipment Side of the business, as well as using standard processes and programs and best practices ensuring those across the business. So this is a journey. This is not a one-time big kind of hit that we get.

So this is a journey and as we continue to move forward we continue to focus on those places where we think we can improve our pricing effectiveness based on the competitive environment, our ability to add value etcetera. So we expect to continue to gain some pricing throughout fiscal 2017 and beyond.

We think there's more opportunity for us to get better on the pricing side..

Okay. Got it.

And Kristina, can you quantify the impact of pricing in the first quarter?.

We generally don't comment on what the pricing impact is, but I can tell you it definitely offset the mix impact from the large projects..

Okay. Fair enough. Thank you for taking my questions..

Thanks, John..

Your next question comes from the line of Spencer Joyce from Hilliard Lyons. Your line is open..

Good morning. Thanks for taking my call..

Good morning, Spencer..

Good morning..

Just a couple of quick ones for me. Joe, perhaps this first one is from -- for you.

Could you give us a little color on what some of the exited business items or business lines were with Batesville? Were they a particular casket offering or perhaps some of the ancillary services that you all called in the name of profitability?.

Yes, sure. So, as I talked about a little bit early, we're constantly segmenting our business to understand where we create value for customers and where we generate profitability in product lines.

I think we ended up at Batesville, we had as we went through that exercise we found a number of product lines that have high levels of complexity, created manufacturing issues in our plants, we were not selling high quantities of those products. So we exited some of those product lines.

I think it's important to note though that we constantly innovate and bring new products to the market as well. We probably had more successful product launches here in the last couple of years than we've had in many years. And so this was really a product line rationalization for lower volume, more highly complex products that we offer.

It happens as some of those were at the lower end of the product range as well for us, so we've had a nice impact in terms of improved efficiencies in our plans and we’ve been able to replace some of those products with more simple products that have a higher customer repeal and we generate better sales from.

So that's how we think about product line rationalization and essentially that's what we've done on the Batesville casket side..

Okay.

So essentially in some sense it was just some natural turnover in your offerings there?.

It was a natural turnover in a particular category, both that it was a natural turnover in a particular category kind of at the lower end of our product line that we -- again simplified and try to replace some of those products with -- again more simple products that run through our plants easier, but also are better received by our customers..

Okay. Switching gears to plastics, great to see a second sequential quarter here of some uptick in activity for some of the large stuff.

My question is, are we working through perhaps some pent-up demand or are we kind of back to a sustainable base for growth? I know it’s a little tough when we’re talking about kind of bit of a project based business, but any kind of delineation there would be helpful..

Yes. Spencer, we’ve Kim Ryan, who is the President of our Coperion business, who really is -- that’s our plastics business. Let me turn this question over to Kim..

Good morning.

How are you?.

Hi. Doing well. Thanks..

I just wanted to respond on that and indicate that from our point of view I wouldn't characterize that as pent-up demand. I think we saw some delays last year and it's just a normal flow of projects, but we -- this business is characterized by point of -- by periods of investment and then utilization of that investment.

And right now what we are seeing in the projects that we’ve been awarded as well as the pipeline is just a good solid steady flow of projects generally in all geographic regions for our large machines business..

Okay, perfect. It's really helpful. Great to hear. That’s all I have. Thanks..

Okay. Thanks, Spencer..

Thanks, Spencer..

We have no more questions. So now I’d like to turn the call over to Joe Raver for final remarks..

Thank you, Operator, and thanks to everyone for joining us today on the call. We look forward to speaking with you again in May, as we report our fiscal second quarter results. Thanks again and have a great day..

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