Chris Gordon - Director of Investor Relations Kenneth A. Camp - Chief Executive Officer, President, Director, Chairman of K-Tron International and Chief Executive Officer of K-Tron International Cynthia L.

Lucchese - Chief Financial Officer and Senior Vice President Joe A. Raver - Senior Vice President and President of Process Equipment Group Kimberly Ryan

Daniel Moore - CJS Securities, Inc. Clint D.

Fendley - Davenport & Company, LLC, Research Division

Thank you, Ally, and good morning. Welcome to our earnings call for the second quarter of fiscal 2013, which ended March 31.

After the market closed yesterday, we issued our earnings press release for the fiscal second quarter of 2013. This document is available on our website, and the information in it may be useful for today's call.

With me on the call are Hillenbrand President and Chief Executive Officer, Ken Camp; and Chief Financial Officer, Cindy Lucchese. During the course of today's conference call and the question-and-answer session that follows, we may make projections or other forward-looking statements that are subject to the Safe Harbor provisions of the securities laws regarding future events or the financial performance of the company.

We caution you that these statements are only our view of the future and that actual results may differ materially. We also alert you to the risks described in the documents we filed 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 obligation to update or correct any forward-looking statements. Now let me provide some information regarding our call.

We 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, and Cindy will follow with financial results.

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]. Now it's my pleasure to turn the call over to Ken Camp, Hillenbrand's President and Chief Executive Officer.

Ken?

Thanks, Chris. Good morning, everyone, and thank you for joining us today.

One thing that is evident from our results this quarter is the value of diversification in our portfolio. This year, Batesville is performing very well and Coperion added nicely to our revenue and bottom line, and that performance helped offset the decline in our other Process Equipment Group businesses driven by softness in a couple of specific markets, which we'll talk about.

Overall, we had strong results with growth of more than 50% over last year. The Coperion acquisition was the largest driver of this growth, but I'm pleased to report another quarter of solid performance for Batesville, helped as well.

From a bottom line perspective, adjusted EBITDA increased 10%, and you may recall this metric is one of the most important metrics we use to assess bottom line performance since it corrects for the effects of acquisition accounting and provides a clearer and more consistent picture of the performance of our ongoing operations. Cindy will provide us more details regarding the financial results later in this morning's call.

I'll start my discussion with the performance of the Process Equipment Group. This is the first time, as I said, that Coperion is reflected in our results for the entire quarter, and they added nicely to both our revenue and bottom line, representing significant revenue growth.

The remainder of the Process Equipment Group was down 18% when compared to 2012 due to a couple of factors, which we anticipated and have reflected in our previous calls. First, after an overheated growth in the frac sand and potash markets last year, there was a softness in these markets this year as things are moving back into balance.

We see this as more of a correction than a substantive shift in market behavior and expect significant long-term growth in both of those segments. Second, there's a natural lumpiness to the capital equipment part of our business, a condition which has been exacerbated by a high degree of economic uncertainty, especially in Europe.

This has resulted in a delay in the timing of delivery dates of ordered and, in many cases, completed products to some customers. We've not experienced any order cancellations and believe the timing issues are the result of customers being slower to bring some production lines onstream.

For the final topic related to the Process Equipment Group, I'll give you a brief summary of how Coperion is doing. Coperion's performance is meeting our expectations in nearly every way.

We're pleased with their top and bottom line contribution in the quarter, and we're encouraged by their strong order level and healthy backlog. In fact, the only area where we've seen a bit of a change is their near-term working capital needs, and Cindy will address that more in her remarks.

Joe Raver and his leadership team are diligently working to realize near-term opportunities for Coperion and our existing companies to work together and are developing the longer-term strategy and unified approach, which we will reveal to you in future calls. We're focused on ensuring the benefits of the acquisition and their fully realized -- to make sure these benefits are fully realized as quickly as possible, and we're optimistic about the strength of the combined entities' ability to generate increased sales and increased operating margins.

While it's still early in the game in our relationship with Coperion, we're very encouraged by the number of quotes, as well as orders placed for Coperion systems that include K-Tron or Rotex equipment. Additionally, Joe's integration team is finalizing their plans to leverage Coperion's footprint in what are new markets for the remainder of the group to accelerate their performance and to reach -- enhance their geographic scope.

And finally, over 100 members of the Process Equipment Group's worldwide management team have been through our concentrated, in-depth lean boot camp. They're already using these lean skills to identify opportunities to increase margins and overall profitability within the business.

And while the practice of lean is not a short-term process, it will generate greater financial results for the future. As I talk -- turn to the Batesville performance -- platform performance, let me say how pleased we are with all that Kim Ryan and the Batesville team have done to build momentum coming into 2013.

They had another very robust quarter, increasing their revenue 5%, growing their gross margins by some 200 basis points and producing increased adjusted EBITDA growth. And this growth benefits -- or I'm sorry, illustrates the benefits of the strategic changes they've made and the plans they methodically executed to increase volume, improve mix and generate bottom line results.

As we think about the longer-term trends for Batesville, health care is getting better and people are living longer, thank goodness for all. And while the demographics of an aging generation of baby boomers are expected to be a factor in the future, it's impossible to predict with any measure of certainty what's in store for the North American death rate.

As the funeral industry continues to evolve, Batesville will be as lean and flexible as possible to continue generating solid financial results for Hillenbrand. Now I'll turn the call over to our CFO, Cindy Lucchese.

Cindy?

Thank you, Ken. As you know, we usually file our 10-Q at the same time that we issue our quarterly earnings release, but this quarter, we'll file the 10-Q a couple of days later, and that's an order to give us more time to finalize our new disclosure related to the subsidiary guarantee of our notes.

You might have noticed we included some additional supporting schedules in our earnings release so that we can provide you with some of the key information that will be available in our Q when we file it. Turning to the financials.

In summary, both of our business platforms delivered strong top line growth, and consolidated adjusted EBITDA grew by 10%. Revenue grew more than 50% to nearly $400 million.

Driving this growth was the acquisition of Coperion, with our Process Equipment Group delivering $227 million in revenue, 136% increase over the prior year. And as Ken mentioned earlier, if you exclude Coperion, our base Process Equipment Group had a tough comparable quarter.

The second quarter of 2012 was heavily influenced by deep demand for hydraulic fracturing equipment and a large base resins project resulting in an 18% year-over-year decrease on our top line. Now in addition, the sluggishness in many economies around the world, most notably Europe, has impacted the demand for our equipment.

So looking at order backlog, it was $544 million, slightly down sequentially from first quarter backlog of $557 million. Now turning to Batesville.

They had a strong quarter with revenue growing 5% to $171 million, and this growth was primarily driven by volume and, to a lesser extent, an increase in the average sales price. From a gross margin standpoint, gross profit margin for the second quarter was 34.3% or 37 -- 36.7% on an adjusted basis.

As we discussed during our last earnings call, we expect our gross profit margin to be lower than the prior year because Coperion has lower gross profit margins on certain systems projects. Approximately 1/3 of their business includes third-party stores products or buyout where margins are minimal.

But the other 2/3 of their revenue comes from their own proprietary equipment sales and parts and service where margins are attractive and very similar to margins in other Process Equipment Group products. In addition, gross profit margin was lower year-over-year in part due to the lower volumes.

So as a result, on an adjusted basis, the impact on the Process Equipment Group this quarter was a decrease in gross profit margin from about 44% in 2012 to about 34% in 2013. Given the impact of the Coperion buyout, adjusted gross profit margins in the Process Equipment Group should be in the low 30 percentage range going forward.

Batesville gross profit margin improved 200 basis points to 39.9% or 40.7% on an adjusted basis, and the improvement was driven by higher volumes, offset in part by changes in employee benefits that reduced expense in the prior year by about $1 million. Our adjusted effective tax rate this quarter was 29.3% compared to 32.8% in the prior year.

Now the improvement is primarily due to the acquisition of Coperion, which produces the larger percentage of income from foreign sources and lower tax rate jurisdictions. As a result of the acquisition, we expect our full year adjusted effective tax rate to be somewhere around 30%.

Operating cash flow was $20 million for the first half of the fiscal year compared to $60 million last year, and the decrease in cash flow was due to our increased investment in the working capital at Coperion. Certain projects currently underway at Coperion had payment schedules where a large portion of the cash will be received in later stages of manufacturing.

Terms of these deposits and progress payments vary greatly among industries as well as geographies. So the working capital requirements at Coperion can range from an optimal negative networking capital position, where cash received from customers is more heavily weighted towards the beginning of the project, to the current position where a larger portion of the cash will be received in later stages of manufacturing.

While we expect working capital will fluctuate in the future based on the mix of projects and process at any point in time, we think it's unlikely that additional significant working capital investment will be required for the remainder of the year. In addition to the investments and working capital of Coperion, we also had about $11 million of increased business acquisition costs related to Coperion and $5 million of payments related to antitrust litigation this year.

But looking forward to the future, we expect our strong cash flow generation capabilities to return to historical levels. Turning to bottom line results for the quarter.

Net income decreased 54% to $13 million, with earnings per share of $0.20. The decrease was driven by the costs associated with our Coperion acquisition.

On an adjusted basis, net income was in line with the prior year at $31 million, with earnings per share of $0.49. Note this includes $3 million of additional recurring amortization expense related to Coperion.

Given our strategy to grow through acquisition, it's the natural consequence to incur related expenses such as amortization and interest. Because of this, we use adjusted EBITDA as an important measure to monitor our ongoing operating performance.

This quarter, adjusted EBITDA increased 10% to $64 million. And now given Coperion's average adjusted EBITDA margin of about 10% compared to the higher margin that we have in the rest of our business, we expect our overall adjusted EBITDA to be in the low- to mid-teens going forward.

Turning to guidance. We are reaffirming the guidance we shared with you in early December.

We continue to expect 2013 global revenue to be approximately $1.6 billion and adjusted diluted EPS to range from $1.82 to $1.92. We also expect the Process Equipment Group to deliver about $1 billion in revenue and Batesville about $600 million in revenue.

Based on our visibility in the backlog, we continue to expect the fourth quarter to be our largest, both from a revenue and earnings perspective. Now I'll turn the call back to Ken for his concluding remarks.

Ken?

Thanks, Cindy. Let me close by saying that while there were elements of our performance in the second quarter that were very strong, with Batesville performing well and Coperion adding nicely to our revenue and bottom line, we're not satisfied with other parts of the business.

Most of them are -- most of the issues this quarter have been driven by market conditions, which we had anticipated to a large degree and mentioned in earlier calls. But nonetheless, the results in the rest of the Process Equipment Group don't meet our long-term expectations for sure.

However, we're convinced that we are on the right track in those businesses, and we just have to deal with the uncertainties that are taking place in the market and make the businesses as efficient and effective as possible to capitalize on a market rebound. The bottom line in all of this is, even with the decline in the other Process Equipment Group businesses during this quarter, we're right where we expected to be happy halfway through the year from an EPS point of view, and we remain confident in our guidance for the full year.

Additionally, while we can't control the lumpiness of our order flow or shipment dates that customers change based on some of their own needs such as plant construction, et cetera, including industry demand, we can focus on those initiatives and lean business skills throughout the business, and we're doing that. And we'll continue our strategy of diversification to make sure that we have some balance in the effect or the way that businesses that we have are affected by world market conditions.

We're deeply committed to our acquisition strategy that's been the key to our growth over the past few years, and we will always make the best long-term decision for shareholder value. The Coperion acquisition, as you know, is the latest step in the strategy, and while we continue to evaluate acquisition candidates on a constant basis, we remain focused on successfully managing the integration of Coperion.

And given its size and scale, our teams naturally have plenty of work to do to realize the full benefits that we're expecting. The goal continues to be revenue growth and profitability through successful implementation of the strategy, and we focus on strong cash generation that strengthens our balance sheet and enables us to further execute this strategy.

And we, most important, are committed to being careful stewards of the company and to providing meaningful value to our shareholders. Now for the Q&A session, we'll be joined today by and Process Equipment Group President, Joe Raver, who is in Zürich; and Batesville President, Kim Ryan, who is here with us now.

We're ready to take your questions. And Ally, would you please open the lines?

What organic growth rates are you assuming for K-Tron and Rotex for the back half of the year and better than $1 billion Process Equipment Group revenue guidance?

We'll have Joe...

Yes, It's Joe. The issues that Ken mentioned that are with us from a market perspective in Europe with particularly frac sand and potash, those are not going to go away over the short run, and we expect those to stay with us and impact our performance in the second half of the year.

With that said, we do not expect to see a similar decline as we saw in Q2. So we expect to have relatively flat to slightly declining year-over-year revenue growth in the second half of the year in the organic part of the Process Equipment Group, which we normally think of the brands K-Tron, Rotex and TerraSource.

And then just a comment, if I can, on the rest of the Process Equipment Group, when we think about Coperion for the second half, we do expect a significant pickup in revenue in the second half of the year from the Coperion business.

Organically? Coperion, you expect significant organic growth in the back half of the year?

Yes, from -- sequentially, sequentially. So compared to the first -- our Q2, our first full quarter with Coperion, we'll see a pickup on a sequential basis.

By the way, that is also a pickup on a year-over-year basis as well.

Okay. And can you -- Ken mentioned some of the impact in Q2 was timing of some orders slipped out of Q2.

Can you quantify roughly the order of magnitude, how much of revenue slipped out of Q2? And how much you might expect to make up in Q3?

Well, I'm hesitant to give a precise number for what went from Q2 or what we expect to go from Q2 into Q3. I think we'll always have situations where based on market conditions or customer conditions where our projects will be pushed out.

And so if you look at the year-over-year quarter, we had a very big project in Q2 of 2012 that did not recur this year. We also did have a sizable project that we expected to shift and for us to book the revenue in this quarter.

That project is crated up. It's actually sitting at the port.

And it's really a customer issue with their ability to take deliveries. So that happens occasionally with a large project, and that happened to us in this past quarter.

Okay, and I'll switch gears quickly. Cindy, you talked about cash flow, obviously, a couple of minor impacts there.

What are you projecting for cash flow from operations for the full year?

We don't have an actual-- we don't estimate that or project that. But I would tell you is, clearly, we expect it to be stronger than it was last year.

We are looking, as I mentioned earlier, in working capital remaining stable or getting better at Coperion, and so going back to our more historical strong cash generation levels.

And lastly, can you give us a little more detail what is it about the current state of business at Coperion that puts us in that sort of positive net working capital position? Is it customer-driven?

Is it geography-driven? What is it that creates that dynamic?

Dan, it's Joe. You pretty much nailed it there.

There are really 2 major drivers that impact the working capital requirements. The first is a mix of business.

And so the type of business it is, we have certain elements of that business that have more favorable working capital dynamics just because of the nature of the project. Right now, we have strong order intake and a strong backlog and pipeline.

It happens to be more heavily weighted right now towards projects that are more traditionally oriented towards working capital where we're investing in raw materials and good stability equipment. We expect that to get back to a more normal mix of business over time.

It doesn't happen overnight. If you'll recall, these are pretty large projects that can range from EUR 5 million to EUR 10 million to EUR 15 million.

And so we do expect it to get back to normal over the coming quarters. But for the next couple of quarters, I mean, we can look into the backlog and the order pattern.

We're not going to see a dramatic shift over the next couple of quarters, but we certainly don't expect it to get any worse, and there's a good possibility that it will improve. But it won't be a dramatic shift based on the orders that we have in-house right now.

The second driver is also what you mentioned, which is their -- payment terms vary in different parts of the world. We had a very heavy mix of Asian business at Coperion that's coming through right now, and so the payment terms there tend to be a little bit different than in the rest of the world and a bit more back-end loaded than in other parts of the world.

So those are the 2 biggest drivers of the increased working capital. And again, we expect that to balance out over time particularly as our product mix shifts, as well as more North American projects, particularly some of these larger projects that we expect in the polyolefin business, move to North America.

Dan, It's Ken. If I could add one point there from my viewpoint.

As we've examined Coperion prior to the acquisition, we were aware that the level of net working capital would vary from time to time based on the kinds of conditions that Joe has mentioned. So it wasn't entirely a surprise to us.

And their history and the experience of the management team is it moves as some of the larger projects where there are high upfront payments as they come in, it gets much more favorable. In fact, it periodically goes to negative net working capital sometimes moves the other way.

So I think the important thing is to think about this as not a permitted investment in net working capital. And by the way, the investment we have in there is not atypical of what you'd find of a business that size, the investment working capital -- net working capital.

So most of the time, we're very favorable and it's a great condition. We're sort of getting more like other companies for this temporary period, but their history has shown it'll move back the other way as the mix of new contracts come in from time to time.

Not to beat a dead horse, but I guess, on the working capital needs at Coperion, it sounds like part of it, obviously, is doing more business in Asia. Any chance that there could be a change in that in the future?

I guess, and I would assume that a lot of this is contract-driven at the start of the relationship. Is that going to be and just represent the cost of doing business in Asia then?

Clint, it's Joe again. I don't think so.

I mean, I think that we are going to see a shift in our business. Again, we've had very heavily -- a very heavy Asian component to the business recently, but we believe that, that will shift more towards Europe and North America in the future.

And so again, we believe that this is a timing issue and this will fluctuate as we go forward. But ultimately, we'll get back to a more normal kind of profile and working capital with Coperion.

Okay. And I think you guys have been pretty clear that they're -- it's pretty common to have many booms and busts of the frac-ing side.

I mean, how do you see that industry playing out over the next several months? Do you think things will begin to pick back up anytime soon?

We launched the new equipment a couple of years ago and the market really just loved it, high-capacity screeners, perfect application in fracs and in propane. There was a huge gold rush in natural gas and hydraulic fracturing.

And so the demand was really super high for our equipment related to propane processing and production. That demand overshot -- or that supply overshot what was required in the marketplace, and then it's really dropped off almost completely here this year.

And I think as we mentioned in the last call, it was almost like any requirements for at least 2013 were pulled into 2012 because of the pace of that market. We don't expect to see an uptick in 2013.

We don't -- we're not sure exactly when this market will come back. I mean, we thought it would be back a little bit earlier than it's proven to be.

But we'll have to continue to keep an eye on this market both in North America and around the world. We feel strongly that it will come back.

I mean, natural gas prices will continue to rise at some point, makes the investment pieces better, and so we'll see an increased demand for propane used in hydraulic fracturing. We've also taken a look with industry experts around the world, and so where will this happen next?

And so we've got those locations identified around the world where there are shale gas deposits and more likelihood that people will look to access those in certain countries, and so we're working to make sure that we're well positioned when this phenomenon takes place in the rest of the world. But when that will be is really hard for us to predict and a lot has to do with pricing of natural gas right now.

But just to be clear, there's nothing about the technology change, I guess, with regard to the drilling that has rendered your equipment in any way obsolete, correct?

That's correct. No, this is really just a classic boom-and-bust cycle in fracs and production.

And no, the equipment is still world class and the best without a question. It's out there to process propane, including frac sand.

So we don't see a technological shift. We don't -- we're not losing jobs.

They're just -- it's really just come to a halt here for a while as demand had to catch up with supply.

Okay. I guess, moving over to the Batesville side, and obviously, a strong quarter there for that segment.

Just wondered the view into the volumes and how they played out month by month and how you guys see the volume story really going from here.

Clint, it's Kim. Thanks.

We actually saw for this quarter, we saw, I think, similar to everyone who operates in this market a big January, with February and March returning to more normal levels. We continue to see that throughout the year as that's a continuation of what we saw in the first quarter.

In terms of what we expect for the last half of the year, I mean, the great unknowable again, obviously, we don't -- we haven't seen a year this large. This is a very large year for a good marketplace especially in January, which was largest the best month we've seen on all the records that we keep, frankly.

But we -- right now, what we're planning for is for things to return to more normal levels, and that's kind of what we've continued to see. I think that's what the market is reacting to right now.

Okay, that's helpful. And then last question.

I'm a little surprised to see the $5 million in the antitrust. I thought we were done with that.

Is that -- does this represent the final amount? Or could there still be some more payments related to that?

Clint, it's Cindy. This is one of the things that'll hang with us for the rest of the year.

We made the payment in early October. So that's why the cash payment happened in 2013 but the settlement happened in 2012.

And it is behind us. So once we get past this year, you are right, we will never see it again.

Just, Joe, if you happen to have the size of that resins-based project in Q2 of last year, just looking at the comp from last year.

Dan, I think that project was about $7.6 million or $7.7 million in Q2 of last year.

And lastly, Cindy, any update on CapEx expectations for the full year?

We have -- our expectations have not changed. We have talked about the fact that really all of our businesses need very little CapEx, given the cash they generate.

So that's a very positive thing. We've talked about it being somewhere probably in the $30 million range or so.

We still don't expect that to change.

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