May 8, 2012
Operator
Good morning, everyone, and welcome to Hillenbrand's earnings call for the second fiscal quarter of 2012. A replay of the call will be available until midnight, Eastern Time, Tuesday, May 22, 2012, by dialing 1 (855) 859-2056 toll free in the United States and Canada or 1 (404) 537-3406 internationally and using the conference ID number 43746905.
This webcast will be archived on the company's website at www.hillenbrand.com through May 8, 2013. If you ask a question today, it will be included in any future use of this recording.
Also note that any recording, transcript or other transmission of the text or audio is not permitted without Hillenbrand's written consent.
Operator
At this time, it is my pleasure to turn the conference over to Chris Gordon, Director of Investor Relations. Mr.
Gordon, please go ahead.
Chris Gordon
Thank you, Allie, and good morning. Welcome to our earnings call for the second quarter of 2012, which ended March 31.
With me on today's call are Hillenbrand President and CEO, Ken Camp; and Chief Financial Officer, Cindy Lucchese.
Chris Gordon
During the course of today's conference call and the question-and-answer session that follows, we may make projections or other forward-looking statements that are subject to the Safe Harbor provisions of the securities laws regarding future events or the financial performance of the company. We caution you that these statements are only our view of the future and that actual results may differ materially.
We also alert you to the risks described in the documents we file with the Securities and Exchange Commission, such as our annual and quarterly reports on Form 10-K and 10-Q. We do not undertake any obligations to update or correct any forward-looking statement.
Chris Gordon
Now, let me provide some information regarding our call. We've scheduled 1 hour, and we'll start with prepared remarks from Ken and Cindy that should last approximately 20 minutes.
Ken will start with an overview of the business for the past quarter. Cindy will follow with financial results, and Ken will wrap up the prepared portion of the call with some closing comments.
After that, we'll move directly to Q&A when we'll be joined by Batesville President, Kim Dennis; and Process Equipment Group President, Joe Raver. If you have follow-up questions after the call has ended, please feel free to call me at (812) 931-5001 or email me at [email protected].
Chris Gordon
Now, it's my pleasure to turn the call over to Ken Camp, Hillenbrand's President and CEO. Ken?
Kenneth Camp
Thanks, Chris. Good morning, everyone, and thank you for joining us today.
After the market close yesterday, we released our earnings and filed the 10-Q, and both documents are available on our website at this time.
Kenneth Camp
As you saw, we achieved double-digit revenue growth, with gross margins just over 40%, and were able to meet the Street's expectations for the quarter with adjusted earnings per share of $0.50. Once again, our quarterly results were strengthened significantly as a result of our acquisition strategy to diversify our holdings into various growth industries.
Kenneth Camp
Throughout our operating company acquisitions in 2010 and 2011, the Process Equipment Group has continued to exceed our expectations and has grown to represent 37% of our total enterprise revenue and just over 1/3 of our total EBITDA. Diversification has also expanded our geographic reach with about 17% of our revenue now coming from outside the United States.
We've grown revenue at a compound annual rate of 44% in the Process Equipment Group since our first acquisition in 2010, and we've achieved annual double-digit organic growth in the acquired businesses.
Kenneth Camp
Additionally, they've been attractively accretive with these businesses adding $0.14 to our earnings in the second quarter. Based on the success of this growth strategy, we grew consolidated revenue 13% to $260 million and generated $60 million in cash flow in the most recent quarter, all this despite the volume challenges in the Batesville business that we'll discuss shortly.
As you can see, we're getting consistently positive results from the continued execution of our established diversification strategy.
Kenneth Camp
It's been our practice to provide a brief overview of the performance of our business platforms. And as usual, I'll begin with comments regarding the Process Equipment Group, which continues, as I've said, to perform at exceptional levels.
This group generated $96 million in revenue in Q2, which is 66% more than last year. While a significant amount of this increase came from the addition of Rotex, the Process Equipment Group achieved organic growth of 18% across the board.
In addition, the Process Equipment Group's consolidated order backlog grew 6% sequentially to $137 million. This backlog currently represents approximately 1/3 of the platform's annual revenue.
Kenneth Camp
As we've said before, one of the core elements of Hillenbrand's growth through acquisition strategy is to acquire successful companies with great brands that can benefit from our capabilities in Lean business, strategy management and intentional talent development.
Kenneth Camp
Since I frequently get asked how Lean business turns into better financial results, I'll give you a recent example. It typically takes a company about a year to understand the building blocks of Lean and to begin to apply these new skills effectively.
The employees at Rotex are making excellent progress at understanding Lean. And since the acquisition last August, the Rotex team has leveraged their Lean business skills to increase throughput on key equipment by as much as 50%.
In 6 months, they've eliminated some production bottlenecks, achieved significant annualized savings, freed up 1,800 square feet of shop floor space that can be used for further growth and reduced working capital by more than $300,000.
Kenneth Camp
These gains are the beginning of preparing Rotex to produce more with less waste and without adding brick and mortar. Simply put, our first 6 months with Rotex has exceeded our expectations in many ways.
Their revenue has been strong, and their bookings have continued to increase.
Kenneth Camp
K-Tron also continues to perform well despite the uncertain economic conditions in Europe, and to a lesser extent, China. As they've implemented their initiative to increase growth by providing system solutions to a broader range of customers, they've seen their sales revenue increase.
However, in providing these systems, which sometimes involve equipment purchased from third-party manufacturers, the margin percentage decreases slightly. However, most important, margin dollars continue to increase.
The Size Reduction Group's leadership team has developed and is currently implementing their transformation plan to consolidate manufacturing operations into a single organization, managing our 3 well-known brands
Pennsylvania Crusher, Gundlach and Jeffrey Rader. This plan includes production realignment, relocation of some engineering resources, sales of administrative personnel and the closure of the South Carolina manufacturing plant.
Combining these operations with their growing Lean skills will enable the Size Reduction Group to be more efficient and support their growth goals also with less brick-and-mortar facilities.
The Size Reduction Group's leadership team has developed and is currently implementing their transformation plan to consolidate manufacturing operations into a single organization, managing our 3 well-known brands
While the Process Equipment Group's strong performance has been a big plus, the funeral products industry has encountered severe headwinds in the last 2 quarters. As you could see from our release last night, the most significant driver affecting Batesville's 5% drop in revenue for the quarter was a 6% decline in the North American burial market.
As many of you have already heard from the Center for Disease Control and from the other public companies in the death care industry, the U.S. and Canada did not experience any material levels of influenza and pneumonia this year.
And this was a contributing factor in total death levels being lower than at any time since 1982.
The Size Reduction Group's leadership team has developed and is currently implementing their transformation plan to consolidate manufacturing operations into a single organization, managing our 3 well-known brands
Although everyone has been trying to understand the origins of this decline in deaths, no one is able to say why the number has gone down so dramatically. I'll tell you that we study these statistics on a regular basis, and history suggests the industry should expect to see total deaths return closer to the norm as the year progresses.
However, given the variance we've seen this year, we're hesitant to make a prediction of what is essentially an unknown element.
The Size Reduction Group's leadership team has developed and is currently implementing their transformation plan to consolidate manufacturing operations into a single organization, managing our 3 well-known brands
We also estimate that cremations have increased by about 160 basis points, which is flat relative to Q1. This is also somewhat higher than the long-term trend of 120 basis points that we've observed in past years, but a lower rate than we experienced in 2009 and 2010 during the most significant parts of the economic downturn.
The Size Reduction Group's leadership team has developed and is currently implementing their transformation plan to consolidate manufacturing operations into a single organization, managing our 3 well-known brands
Obviously, the burial market and the cremation rate are outside of our control, so we focus on those things where we can have a positive effect. We're constantly evaluating our performance, rightsizing the organization at all levels to respond appropriately to the changing customer demands in the markets, whether up or down.
We continue to take decisive actions to ensure our long-term market position and to manage costs, while at the same time, maintaining our superior customer service and quality. This ensures that Batesville is making our caskets that our customers require in the most proficient efficient manner and continuing to differentiate Batesville and help them maintain their important and long-standing relationships with funeral directors.
The Size Reduction Group's leadership team has developed and is currently implementing their transformation plan to consolidate manufacturing operations into a single organization, managing our 3 well-known brands
Now, I'll turn the call over to our CFO, Cindy Lucchese. Cindy?
Cynthia Lucchese
Thank you, Ken. Given the volume challenges Batesville faced during the quarter, we're pleased with our results.
As Ken said earlier, we achieved double-digit revenue growth, had healthy 40% gross margin and met our expectations at the bottom line, earning $0.44 per share or $0.50 per share on an adjusted basis.
Cynthia Lucchese
Now let me take you through the details. Total second quarter revenue grew 13%.
A key driver of these strong growth numbers was the Process Equipment Group, which delivered a 66% increase in revenue. Now an important metric we track is organic growth, which we define as the year-over-year comparison of revenue on a constant currency basis, with all of our acquired companies included in the base year.
We believe this is important because it shows comparable performance, not only for the core Process Equipment Group, but also the year-over-year growth in newly acquired Rotex.
Cynthia Lucchese
As Ken mentioned earlier, the organic growth for the Process Equipment Group was an attractive 18%, and Process Equipment Group revenue is fast approaching the $100 million per quarter mark, with $96 million recorded this quarter. In addition, for the eighth quarter in a row, and in fact, ever since we purchased K-Tron, the Process Equipment Group's backlog grew, reaching a total of $137 million at the end of the second quarter.
As you may recall, future revenue associated with the Process Equipment Group is strongly influenced by order backlog. On a quarter-by-quarter basis, we expect to see some volatility in this number, particularly when we ship very large orders.
However, we're more than pleased to see the continued strong growth in our order backlog.
Cynthia Lucchese
As we've discussed in many of our past calls, the Process Equipment Group can experience lumpiness from quarter-to-quarter when sizable jobs are completed and shipped. Like most years, we have a few unusually large orders that will impact our revenue in Q4.
Given our visibility into backlog, we expect Process Equipment Group revenue in the third quarter to be in line with the second quarter and the fourth quarter to be their largest revenue quarter this fiscal year.
Cynthia Lucchese
Batesville's revenue was $164 million or 5% lower than the prior year, driven by a 6% decline in North American burial. The sharp drop in the North American burial market was driven by a 3% year-over-year decline in North American deaths during the first half this year.
Our gross profit margin for the second quarter was 40.2%. On an adjusted basis, our gross profit margin was 41% or 330 basis points lower than the prior year.
Now as a reminder, the items we adjust for include restructuring charges at both of our business platforms. I'd like to provide a few details on these restructurings, before I turn to the other drivers of our quarterly gross margin.
Cynthia Lucchese
At Batesville, we continuously size our operation to respond to changing market conditions and customer preferences. We consolidated our first and second shift at one of our plants in the second quarter to better size capacity to current demand.
At the Process Equipment Group, we realigned the organization and consolidated certain manufacturing facilities. This resulted in the closure of one manufacturing plant that will allow us to more efficiently meet customer needs while continuing to provide the same high-quality products and services.
Cynthia Lucchese
These restructurings underscore our relentless focus on improving operations through Lean whether we're experiencing strong growth as in the case of the Process Equipment Group or lower volume as we're currently experiencing with Batesville. Lean business is ingrained in the Hillenbrand culture, and we will continue these efforts to preserve the strong bottom line results that we demand, and our shareholders have come to expect.
Cynthia Lucchese
Let me provide a few additional details on our gross margin statistics for each of the operating company. On an adjusted basis, Batesville's gross profit margin was 39.1%, a 460-basis-point decline from the prior year.
While increased commodity prices of about $2 million impacted margins, the big driver was the lower volume.
Cynthia Lucchese
The Process Equipment Group's adjusted gross margin was 44.3% versus 46% last year. A variety of factors influenced their margin including the timing and size of orders, the mix of products and services sold and market factors that impact pricing.
We expect it to fluctuate, sometimes as much as 200 to 300 basis points between quarters. However, the adjusted gross profit margin should fall within the normal historical range on an annual basis.
The adjusted gross profit margin for fiscal year 2011 was about 44%, and we expect 2012 to be in this range or slightly below.
Cynthia Lucchese
For the quarter, operating expense as a percent of sales was 23.3%, a 20-basis-point improvement over the prior year, while on an adjusted basis, the ratio improved by 90 basis points. We saw improvement across the board at both of our business platforms and at corporate as well.
Note that we made certain changes for employee benefits this year that reduced operating expenses by about $2 million that won't recur in future years.
Cynthia Lucchese
Now the 90 basis point year-over-year improvement includes the ongoing amortization expense from the intangible assets that were established as a result of the Rotex acquisition. They amount to about $1 million of incremental expense for the quarter.
Given that this noncash expense is in the current year results only, if you were to make this comparison on an apples-to-apples basis, the year-over-year improvement would be 120 basis points. This is evidenced in our Lean strategy as paying dividends in the form of reduced operating expenses.
Cynthia Lucchese
Other income and expense was about $6 million unfavorable to the prior year. Now, $3 million of that variance is due to the full collection of the Forethought Note in April of 2011 and the other $3 million is due to investment gains that occurred in 2011 compared to relatively little investment activity this quarter.
Cynthia Lucchese
Our effective tax rate this quarter was 32.7% compared to 34.7% last year. The improvement in our effective tax rate is due primarily to a larger percentage of income coming from foreign sources in lower-rate jurisdictions.
We expect our ongoing effective tax rate this year to be in the 33% to 34% range on an adjusted basis.
Cynthia Lucchese
Now, as we like to say here at Hillenbrand, cash is king, and our results in this area again were positive as we continue to deliver strong operating cash flow quarter after quarter. Operating cash flow increased 30% to $33 million.
Net income decreased 17% over the prior year to $27 million, with EPS down 17% to $0.44.
Cynthia Lucchese
On an adjusted basis, net income declined by 9% to $31 million, and EPS is down 7% to $0.50 as the strong growth from the Process Equipment Group was more than offset by lower Batesville volumes and reduced interest income from the Forethought Note and limited partnership investment. Adjusted EBITDA was $58 million, a 3% decrease compared to the prior year.
Note that earnings from the Forethought Note are not included in EBITDA.
Cynthia Lucchese
In turning to guidance, we are lowering our EPS guidance to $1.70 to $1.78. On an adjusted basis, our full year EPS guidance is $1.68 to $1.76.
Full year revenue is now expected to increase between 13% and 15% on a constant currency basis over 2011. This represents a shift towards the lower end of our original revenue guidance and is directly related to the sharp decline in death during the first half of the fiscal year, offset in part by stronger-than-anticipated growth in our Process Equipment Group.
Cynthia Lucchese
Now, I'll turn the call back to Ken for his concluding remarks. Ken?
Kenneth Camp
Thanks, Cindy. Obviously, the rather sudden decline in deaths hit the funeral products industry, and quite naturally, Batesville very hard.
Despite this unusual effect, Batesville management has been responding to the market opportunities and retaining their market position. And the Process Equipment Group is providing offsetting growth, earnings and cash.
Kenneth Camp
Those of you who know us recognize that Hillenbrand is a thoughtful, prudent company with a long-term view of the future. We're committed to the proven acquisition strategy that is serving us well, and we're constantly exploring 3 levels of acquisitions.
The first is tuck in or adjacent acquisitions that support the growth strategies of one or more of our operating companies, most likely those in the Process Equipment Group. These relatively small acquisitions would allow us to increase our ability to offer system solutions, support geographic expansion or add value to a product line or process.
Kenneth Camp
The second level would be to add an operating company to the Process Equipment Group as we did with Rotex. And the third type of acquisition we continually evaluate is to add a company that represents a third business platform.
Please do not assume that mentioning this implies a signal that a platform acquisition is imminent or that it isn't. It's simply being transparent about all the elements that could be part of our acquisition strategy.
Kenneth Camp
Our criteria for acquisitions have not changed. We want to continue to build Hillenbrand as a global, diversified industrial company with an emphasis on diversification to balance risk and growth.
It's also critical that an acquisition candidate be culturally compatible, successful in its industry, poised for growth and able to leverage our core competencies and strategy, Lean business and talent development to accelerate their results.
Kenneth Camp
We've stated before the goal is that our strategy will result in revenue growth and profitability. As always, our focus will continue to be on strong cash generation that strengthens our balance sheet, enables us to execute our strategy and allows us to pay an attractive dividend.
We're committed to being careful stewards of the company and providing meaningful value to our shareholders.
Kenneth Camp
Now for our question-and-answer session, we'll be joined by Joe Raver and Kim Dennis, the Presidents of the Process Equipment Group and Batesville. We're ready to take your questions.
Allie, would you open the lines, please?
Operator
[Operator Instructions] Our first question comes from Daniel Moore of CJS Securities.
Dan Moore
What range of year-over-year revenue growth rates at Batesville is embedded in your -- for the second half of the year embedded in your updated guidance?
Kenneth Camp
Cindy?
Cynthia Lucchese
Yes, I'll start out there, Dan. Basically, what we did, as you know, we were down 7% revenue year-to-date this year.
And that's on that 3% decline in death. So as we tried to put the guidance together, we certainly don't anticipate that death will necessarily stay down at 3% for the rest of the year, but at the same time, we don't expect a big blip upwards.
So I'd say we looked at it and felt like there'd be a small improvement through the rest of the year.
Dan Moore
And then following up on that, the spread between the 3% decline in death and the 7% decline in revenue, a lot of that was, as you described in Q1 when there was a bit of a revenue pull forward from the prior quarter. Would you expect that spread to narrow as we go through the back half of the year?
Cynthia Lucchese
Yes. And if you look in Q1, I think we were down 8% or 9%, and the market was down roughly 5% or 6%, and then that's the burial market.
Then when you look in Q2, we were down 5%. The market was down roughly 6%.
So we see exactly what you're describing there.
Kenneth Camp
Dan, it's Ken. Additionally, we maintain pretty good statistical analysis looking backwards.
And how many people are going to die is the ultimate unknowable item. So we do our best.
I hesitate to make this comparison; almost like the people that try to forecast long-term weather trends, usually with good success but sometimes it goes awry. And so we're doing our best to just do some statistical analysis, which we've completed and looking to the past for some indications of how the future might unfold.
It's not a guarantee, and it's why we're being prudent with our guidance. But when we look back to the couple of times something like this has happened, the balance of the year does not completely recover, but it does get -- operates in a much more narrow band.
Dan Moore
And without beating a dead horse, it would be fair to say if death, mortality rates did normalize back flattish, that we would have the opportunity to be closer to your original guidance range?
Cynthia Lucchese
No, actually we wouldn't, Dan. I'll tell you why.
Half the year's already gone. So that part's in the bag.
But certainly if it started to get flat, that would help a little bit, but it's not huge.
Dan Moore
Okay. And let me shift gears and jump back in queue.
Obviously, continued strong performance in Process Equipment with backlog up 6% sequentially again. Can you give us a little sense, break that out between either backlog between Rotex and K-Tron or just a little more color on how each of those businesses and the outlooks are performing?
Joe Raver
Dan, this is Joe Raver. Each of the businesses is performing quite well when you look at bookings and year-over-year backlog.
So I think Rotex is having a very strong year. We're very pleased with everything associated with Rotex thus far.
But the other businesses, the Size Reduction Group and K-Tron, also have good booking years going and solid backlogs heading into the second half of the year. So we've really seen solid bookings and backlogs across each of those business units.
Dan Moore
So if you look at that 6%, it wouldn't be a material difference between the 2?
Joe Raver
No.
Operator
Our next question comes from Clint Fendley of Davenport.
Clint Fendley
When I look at your guidance, I'm assuming that most of the weakness here is on the Batesville side. It implies operating margins in the second half that would be significantly lower than we've seen from Batesville.
And I'm just wondering if there's anything else that's happening here? I mean if we're to think that total deaths should return to norm as the year progresses going forward?
Cynthia Lucchese
Yes, Clint, it's Cindy. A couple of comments there.
Probably the first thing to think about the guidance is we did mention -- or as you think about Batesville, basically, they've been in around 39% gross margin this year. And given the volume that we've talked about is in our forecast for the rest of the year, it's just not possible to get back up to what we've normally been at those 40% to 42% kinds of gross margins.
So I think it's fair to say that it'll take us a little bit more time to address that. And I'm sure Kim can probably add to that.
Kimberly Dennis
Right. Clint, it's Kim.
So some other things. I mean obviously, when these kinds of trends hit the industry so quickly and for this type of duration, it takes a little bit of time for everybody to jump in and make the appropriate adjustments.
I mean this is a pretty high fixed-cost business. So some of the actions that we've taken thus far this year, the shift consolidation, a number of changes that we make out in our distribution system to make sure that we're right sized for the appropriate capacity and continued changes in our commodities and our sourcing and all the things that we naturally do to control our cost.
Obviously, those things are ongoing activities, and things that we'll be doing to drive the margin back up. And if we do get a little bit of lift, hopefully, from the death market coming up, that will work to our benefit.
But obviously, as we've done our analysis and done the outlook, we haven't anticipated that to be a significant swing. The other thing that affects us in this type of industry when you've got this much overcapacity is that there is obviously going to be some discounting in the marketplace.
When the flu season does not arrive and everyone is sitting there with lots of inventory, there's a lot of discounting activity that happens across the board as some try to monetize their investment and their inventories. And so we've done what we needed to do to maintain our market position as do our competitors, and we'll continue to keep our activities going.
The most important of which is making sure that we are matching our resources with what the demand in the marketplace is.
Clint Fendley
Would you expect that the discounting would probably lessen as the volumes hopefully return in the second half?
Kimberly Dennis
Traditionally, that is exactly what you'd see.
Clint Fendley
Okay. And do we have the breakout here, Cindy, on the revenue impact from volume and mix shift?
Cynthia Lucchese
Yes, I've got that, Clint. So volume is, by far and away, the biggest driver, it's about $9 million.
And then there's just a small rate in mix impact, call it $0.5 million and then a little negative from FX. So by far and away, it's volume.
Clint Fendley
Okay, okay. And last question here, but I wonder just the expected timing on your new revolving credit facility, and if we should expect that the interest rate there would probably approximate where we're at currently?
Cynthia Lucchese
Yes. Our credit facility expires in March of 2013.
So we're in the window here where we're less than a year, we're clearly looking at that very closely. We've already started to work with our banks and put together a strategy around renewing that.
So you should see something about that clearly before next March, but sometime between now probably and the end of the year. We enjoy an incredibly attractive rate, as I think you're all aware.
We pay about 70 basis points right now in that credit facility. So when we do renew, it will probably go up somewhere in the 100, call it little bit more than that, basis point range.
Clint Fendley
Okay. And I'm sorry, last question.
But how should we think about modeling for the tax rate for the remainder of the year? Obviously, a bit lower than what we were expecting in the quarter.
Should we expect it to stay in that 32% to 33% range?
Cynthia Lucchese
I think that'd be reasonable. If you look at our long-term range, we've kind of thought about it being in the 33% to 34%.
And we've had some positive impact this year from some deferral reversals. So taken outside that big cash that we brought back and the tax impact of that, just looking at an adjusted rate, I think that'd be a reasonable one to use, Clint.
Operator
Our next question comes from Steve O'Neil of Hilliard Lyons.
Stephen O'Neil
I just want to get this straight. You had an $8.7 million decline in the Batesville revenue.
You said $9 million was from volume, a minus $0.5 million from mix and then a minus from exchange?
Cynthia Lucchese
No...
Stephen O'Neil
Or was that mix positive?
Cynthia Lucchese
Right. The mix was positive.
So $9 million volume, a little bit pick up of rate in mix, we'll call that $0.5 million and then a negative $200,000 FX. So you're better off just viewing it as $9 million volume, and that'll get you there.
Stephen O'Neil
Okay. And then you said backlog was $137 million for the Process Equipment Group.
Can you give us an idea what it was maybe at the end of the first quarter or 1 year go?
Cynthia Lucchese
Sure. So the first quarter of 1 year ago -- and remember at first quarter 1 year ago, we did not own Rotex.
So the first quarter 1 year ago, it was $68 million.
Stephen O'Neil
And at the end of the first quarter then?
Cynthia Lucchese
That was Q1 a year ago. Did you want Q1 of this year of 2012?
Stephen O'Neil
Yes, just to compare. I mean I realize it's going to be a lumpy figure.
Cynthia Lucchese
Got it. It's $129 million.
Stephen O'Neil
Okay. And then I didn't write quickly enough.
What was the -- did you give a cremation rate for the quarter and the previous quarter, or were you just talking about basis points?
Kimberly Dennis
Yes, we said about -- it's Kim. We said about 160 basis points this quarter is what we have seen of growth, right, year-over-year.
Operator
[Operator Instructions] Our next question comes from Jamie Clement of Sidoti.
James Clement
Joe, maybe you're the person to ask the question to, I'm not sure. But the relative health of the coal market and of coal companies, in general, is that an important quarter-to-quarter driver of K-Tron sales?
It was always -- it's always kind of been used as an example of some of the things that K-Tron does. But is that important or is it not particularly important on a short-term basis?
Joe Raver
That's a great question, Jamie. The Size Reduction Group is involved both in coal binding and coal power.
And so we don't see big fluctuations on a quarter-to-quarter basis, but the longer-term trend in United States related to coal, particularly coal power, which of course, drives demand for coal mining, is with the legislative and regulatory environment today, there's been a shift away from coal in the United States. So in the United States, we're very focused on our wear parts business, and that's a pretty steady business and does not move a lot from quarter-to-quarter.
Now the other element is coal in the rest of the world is different than coal in the United States. And so we have seen growth in some emerging economies, and we've been very focused on our capital equipment on the coal side, for example, in Russia, in China and some other emerging economies.
And then let me just weigh in one other piece on that, which is our businesses are somewhat related in the sense that as coal has declined in the United States as a source of power generation, hydraulic fracturing for natural gas has increased. And natural gas has been replacing coal.
Our Rotex business is involved in the profit market of primarily frac sand, and so they make screening equipment and separators that get the exact sort of right optimal size sand for hydraulic frac-ing. And so, the shift from coal to natural gas is a negative in one part of our business.
It's not a big mover short term though, it's a longer-term trend. And it's a positive on the other part of our business on the natural gas side.
So that's kind of a long answer to your...
James Clement
No, it's very -- it was very helpful. It was very helpful.
Joe Raver
But generally, we don't see big shifts because of coal usage on a quarter-by-quarter basis because there's a big wear part piece of this business for us.
James Clement
Got you. And Ken, if I could, some others in your industry have brought up weather, the warm weather as being a possible reason for the decline in the death rate.
You all have been hesitant to do so. Do you -- is that something you think about, or because it's out of your control, it's not something that really, particularly, concerns or interests you one way or the other?
Kenneth Camp
It's our belief that the factors that relate to a essentially nonexistent flu seasons. The biggest factor there is that the CDC in the last couple of years has really sort of nailed the vaccines.
More people are becoming vaccinated now on a regular basis for flu. In fact, you've been here, this little town that we live in, you can actually just drive through the firehouse and get your vaccination.
It's very easy, more people do it. I think we think that's a much bigger factor than warm weather.
Although quite frankly, we look to weather trends as ways of trying to understand large natural phenomena like death rates, and I'm not sure that we do understand it, but one thing you can take away from it is, you can't spend a whole lot of time thinking what God's going to do on such a big and most monumental thing. You got to concentrate on what you can do.
That's where we try to put our attention.
James Clement
Okay. Well, I guess just sort of following up.
And I'm just curious kind of how you all think about this is just, if you look just purely at the CDC data through the first 17 months -- excuse me, 17 weeks of the calendar year, you're talking about a 9,000 event drop in mortality. And obviously, there are flaws in the data, and we get that.
But only 2,000 of that's really coming out of the pneumonia, influenza category. So I just -- that's another 7,000 or 8,000 that's coming from something else.
So I was just -- that's why I was asking the question.
Kenneth Camp
Yes, I understand. Remember, while we don't disclose these algorithms, we have a very high regard for the CDC.
Their primary interest is not trying to calculate for us how many people actually died. Their job is saving lives and matching vaccines and so on.
So this reporting that they do is -- has some geographic areas that are notoriously unreliable. And sometimes, major cities don't send in anything.
So we've developed the algorithms we think that short term are a bit more accurate than anything else that's been going on. And that's something we've used for probably 20 years and continue to refine that.
So we, frankly, don't pay too much attention to the short-term things that they have, and nor does CDC. I'll probably get a call from someone, but their job is presenting -- preventing disease and preventing deaths.
This is merely an adjunct for them.
Operator
We have no more questions. So now I'd like to turn the call back over to Chris Gordon for final comments.
Chris Gordon
Thanks, Allie. Once again, thank you, everyone, for joining us today.
And we look forward to speaking with you again in August for next quarter's call. Have a great week.
Operator
That concludes today's conference. Thank you for your participation.
You may now disconnect from the call.