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Hillenbrand Inc  (NYSE:HI)
Q4 2018 Earnings Conference Call
Nov. 14, 2018, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, everyone, and welcome to Hillenbrand's Earnings Teleconference for the Fourth Quarter of Fiscal 2018. A replay of this call will be available until midnight Eastern Time November 28, 2018 by dialing 1-800-585-8367 toll-free in the United States and Canada or +1416-621-4642 internationally and by using the conference ID number 2560919.

This webcast will be archived on the company's website at https://ir.hillenbrand.com through December 14th, 2018. If you ask a question during today's call, it will be included in any future use of this recording. Also note that 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 Rich Dudley, Director of Investor Relations. Mr. Dudley, please go ahead.

Rich Dudley -- Director of Investor Relations

Thank you, operator. Good morning everyone and welcome to Hillenbrand's fourth quarter fiscal 2018 conference call. I'm joined by our President and CEO, Joe Raver, and our Senior Vice President and CFO, Kristina Cerniglia. During today's call, we'll discuss fourth quarter and full-year financial results as well as the outlook for our businesses for fiscal year 2019. After that, we'll open up the call for Q&A.

Before I turn the call over to Joe, let me remind you that our comments may contain 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 course of this call, we'll be discussing certain non-GAAP operating performance measures. I encourage you to take a look at our 10-K, which can be found at our website 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-K and the slides presented with this call.

Now I'd like to turn the call over to Joe.

Joe A. Raver -- President and Chief Executive Officer

Thanks, Rich. Good morning everyone and thanks for joining us today. I'd like to begin the call by briefly reflecting on our recent history and the progress we've made executing our strategy. Fiscal year 2018 marked Hillenbrand's 10th full year as a public company. As many of you know, we're on a journey to transform Hillenbrand into a world-class global diversified industrial company and we look very different today in comparison to where we started in 2008.

At that time, we had one business in our portfolio, the Batesville Casket Company, operating in the death care industry in North America and facing declining demand for burial caskets. Today we're a global diversified industrial company focused on profitable growth. Our Process Equipment Group businesses accounted for nearly 70% of Hillenbrand's revenue this year and more than 60% of the segment's revenue was generated outside of North America. We have a robust operating model that we've improved over time, aimed at driving consistent, repeatable, sustainable results to make Hillenbrand stronger and more profitable.

We're pleased with the progress we've made, but we're not satisfied. We recognize that we have a long way to go to become world-class. We are now focused on building business platforms with leading positions and scale benefits. Our team is committed to the disciplined execution of our strategy to drive profitable growth and make Hillenbrand a world-class global diversified industrial company.

With that, let me turn to our results. As you may have seen in our press release, we delivered strong fourth quarter results, capping off a successful year for Hillenbrand, highlighted by records for revenue, cash flow from operations, earnings per share, and order backlog. We generated growth in each of the Process Equipment Group businesses this year and produced double-digit growth in parts and service revenue. In addition, we improved segment EBITDA margins for the fifth consecutive year. Batesville worked through a number of challenges to deliver higher free cash flow year-over-year despite lower revenue and earnings.

Looking specifically at the fourth quarter, we delivered 7% year-over-year revenue growth, including a solid 12% growth in the Process Equipment Group. We grew the bottom line with GAAP earnings per share of $0.70 and adjusted earnings per share of $0.67, up 8% from the prior year. We also generated a robust $92 million in operating cash flow.

Let me now focus more specifically on the Process Equipment Group. As a reminder, the Process Equipment Group businesses are characterized by highly engineered products, combined with applications and systems expertise that improve mission-critical processes for our customers. Our strategy in this segment is to strengthen our existing platform in plastics and to grow our processed food, pharmaceuticals, separation, and flow control businesses organically and through acquisitions to achieve leading positions in core markets.

Large systems projects for the production of plastics was an area of strength in the fourth quarter, continuing the trend we've seen throughout the year. These projects were the biggest drivers of growth in both revenue and backlog. Our Coperion extruders are at the center of best-in-class systems that can help our customers maximize system uptime and productivity. We've introduced a number of new products and features this year that have been well received by the market and we've been delivering innovative solutions to our customers to address increasingly large and complex projects around the world. We have deep applications expertise and unique ability to provide comprehensive end-to-end solutions for large polyolefin systems.

These are competitive advantages that we credit for making us the partner of choice for some of the largest most challenging projects in the world. These large projects tend to carry lower margins compared to other Process Equipment Group businesses and we anticipate continued mix pressure in the short term. However, we believe the growing installed base of these systems presents a great opportunity to generate highly profitable parts and service revenue in the future.

In our experience, customers want to work with us as the OEM when performing maintenance or modernizing plants to ensure peak performance of their systems and reduce the risk of costly downtime. The outlook remains positive for the development of new polyolefin systems. We see new projects announced and we anticipate more will be added to the pipeline with continued investment in North America and Asia. We expect to win at least our fair share of these projects as we continue to demonstrate the differentiated value we can provide as a partner to our customers.

Moving to the separation business, as expected, we saw deliveries for frac sand screeners soften from earlier in the year, resulting in lower revenue this quarter. We did, however, see growth in replacement and consumable parts utilized by that equipment. We're also staying close to our customers as more production shifts to mines in the Permian Basin, so we can be ready when demand for capital picks up. Outside of proppants, we continue to see GDP type growth in a variety of other screening applications such as minerals and fertilizers.

Well control revenue was up year-over-year for both pumps and valves in the quarter. The industrial waste water market remains strong, especially in the US, while demand has been a bit sluggish on the municipal side of the business. Finally, parts and service revenue growth continued in the fourth quarter. We're focused on leveraging our growing installed base to drive recurring revenue across all product lines in the Process Equipment Group. We delivered solid growth in parts and service for the full year, and we're expecting that to continue in fiscal 2019.

We've made progress on a number of organic growth initiatives this year as demonstrated by the strong results in the Process Equipment Group. We believe these results have been fueled by innovation in our businesses, as we've invested in new products to win in both current and new applications. Additionally, we've leveraged our geographic footprint to accelerate growth in regions like South America and Asia. And as I just mentioned, we've continued to see the benefits of our strategy to grow the parts and service business and increase our base of recurring revenue.

In terms of inorganic investment to accelerate growth, our funnel of M&A opportunities is very good and we'll continue to pursue deals that can drive long-term shareholder value. Our M&A efforts are focused on strengthening our plastics business and building platforms in the areas of process food and pharmaceuticals, separation, and flow control. Our balance sheet is in great shape, largely due to the strong cash flow we've generated over the past few years. So we're well suited to deploy capital for the right opportunities. And while we remain optimistic, we continue to see a challenging environment for buyers due to high multiples. We will remain focused and disciplined as we seek to create long-term value for our shareholders.

Moving to Batesville, our strategy for this business is to build on its leadership position in the death care industry and leverage the Hillenbrand operating model to provide strong predictable cash flow. The business is facing a secular decline in burial casket demand, which was down in the quarter. As a result, revenue was also down year-over-year. Margins improved sequentially from the third quarter, but not to the extent we've forecasted last quarter. The main reason for the shortfall was cost associated with the fire that occurred in one of our metal casket production facilities. The incident was contained to the paint shop area in the plant. Fortunately, no one was injured and production at the plant was only down for a couple of days as our team worked around the clock to ramp back up to full production. We were able to minimize disruptions to our customers, thanks to our associates' tremendous efforts. It's that level of commitment that has helped Batesville preserve the trust of our customers and maintain a leadership position in the death care industry.

Before I turn the call over to Kristina, let me briefly comment on tariffs and inflation. We estimate the overall impact of the announced tariffs to be approximately 1% of incremental cost for the fiscal year 2019, including both the direct cost of the tariffs and the anticipated indirect knock-on effects. The impact is expected to be spread equally across Batesville and the Process Equipment Group. Our teams have been working to offset this headwind through pricing, supply chain, and productivity actions. We believe the impact is manageable for the Process Equipment Group where we have flexibility to adjust pricing and leverage our global supply chain. It will be more challenging for Batesville to offset the pressure due to industry dynamics that may limit our ability to fully realize the pricing actions needed to offset the higher costs. Kristina will provide more detail when she covers guidance.

And with that, I'll turn the call over to Kristina for more detail on our results and guidance.

Kristina A. Cerniglia -- Senior Vice President and Chief Financial Officer

Thanks, Joe, and good morning, everyone. I'll start by reviewing our fourth quarter results. And as Joe said, we had a good quarter. We reported consolidated revenue of $475 million, an increase of 7% year-over-year. The Process Equipment Group was up 12%, which was partially offset by a 2% decrease in Batesville's revenue. Adjusted EBITDA of $81 million decreased 1% and adjusted EBITDA margin of 17.1% was lower by 140 basis points. I will talk more about our margin performance when I review segment results. GAAP net income of $45 million resulted in earnings per share of $0.70 and adjusted net income of $43 million resulted in adjusted earnings per share of $0.67, an 8% increase year-over-year.

We delivered another solid quarter in terms of cash generation with $92 million of operating cash flow. That result was $51 million lower than last year's record fourth quarter due to changes in working capital driven by project timing. We continue to see improvements in our working capital metrics and we're using the Hillenbrand operating model to help drive even greater efficiency in areas like inventory management.

Turning to the next slide, I will discuss segment performance beginning with the Process Equipment Group. The Process Equipment Group delivered revenue of $339 million in the fourth quarter, an increase of 12% over the prior year, including a 2% negative foreign currency impact. The year-over-year growth was primarily driven by continued demand for large systems projects for plastics production along with solid growth in flow control, particularly on the pump side of the business.

Exiting the quarter, backlog strengthened for the eighth consecutive quarter, reaching a record $815 million, a 29% increase over prior year or 32% excluding the negative foreign currency impact. Backlog growth was primarily driven by large plastics projects. We expect a portion of these projects to be completed throughout this fiscal year, however, nearly half of the backlog growth came from projects scheduled for completion beyond the next 12 months. Backlog of the projects scheduled for delivery after the current fiscal year was up more than 50% compared to a year ago.

Process Equipment Group adjusted EBITDA margin of 18.3% decreased 60 basis points in the fourth quarter, driven by the increased proportion of lower margin large systems projects. As a reminder, large systems projects have a high proportion of pass-through content. Nevertheless, we finished 40 basis points higher for the full year, making it five consecutive years of margin expansion in the Process Equipment Group. Over that time, we have improved the adjusted EBITDA margin for this segment by more than 500 basis points. We attribute much of that success to the consistent application of the Hillenbrand operating model across our businesses.

Let me now turn to the Batesville business. Batesville revenue for the quarter was $136 million, down 2% from the prior year, as a result of lower demand for burial caskets primarily due to the estimated increase in the rate at which families opted for cremation. Adjusted EBITDA margin of 21.1% was down 380 basis points. As a reminder, the prior year's fourth quarter margin reflected a one-time benefit from projects to reduce the footprint of our supply chain, making a challenging comparison. That benefit aside, the margin decreased 160 basis points, mainly driven by cost inflation and lower volume, along with an impact of about 60 basis points from the fire Joe discussed. These headwinds were partially offset by productivity gains. Batesville continues to leverage the operating model to identify opportunities to improve productivity and drive cost out of the business as it addresses steadily declining burial volume.

Moving to annual results, our 10th full year as a public company was a year accentuated by many records, starting with top line performance. Our consolidated revenue grew 11% organically to $1.77 billion, including a favorable impact from foreign currency of 3%. Process Equipment Group revenue increased 19% to $1.2 billion with growth in every business. Foreign currency had a favorable impact of 4%. The separation business was especially strong over the first half of the year with a high demand for equipment used to process proppants for hydraulic fracturing. And we maintained strong momentum in large systems projects for base resin plastics and recurring parts and service revenue throughout the year. Batesville's revenue of $551 million was down 2%, in line with our expectations for the full year.

GAAP net income of $77 million decreased 39%, resulting in earnings per share of $1.20. The decrease was mainly driven by non-cash goodwill and trade name impairment charges of $63 million or $0.98 per share taken in the second quarter on reporting unit with exposure to domestic coal mining and coal power. On an adjusted basis, net income increased 15% to $155 million or $2.43 per share. Our adjusted effective tax rate was 25.9%, down from 32.1% in 2017, driven largely by tax reform.

I mentioned our strong cash flow in the fourth quarter and that performance contributed to a record operating cash flow of $248 million for the year. Our free cash conversion rate exceeded 150% of net income, excluding the non-cash impairment charge in the second quarter. During the year, we repurchased approximately 1.4 million shares of common stock for a total cost of $61 million or about $44 a share. We also returned $52 million to shareholders in the form of quarterly dividends and paid down approximately $120 million of debt.

We believe we have a strong balance sheet that gives us a lot of flexibility to execute our strategy. Our top priority is to take advantage of opportunities to continue to invest for growth and improved profitability. We may also repurchase additional shares opportunistically going forward.

In summary, we are pleased with the results in the fourth quarter that helped us finish a good year for Hillenbrand with record earnings and cash flow, and a strong backlog position that provides continued momentum heading into fiscal year 2019.

I will now turn to our outlook for fiscal year 2019. As we look forward, we expect revenue growth in the Process Equipment Group of 3% to 5% at current exchange rates. That growth reflects the negative foreign currency impact of about 3%. We anticipate growth will continue to be driven by the plastics business, particularly the large systems projects that have fueled our record backlog. Batesville is expected to deliver revenue that is down 1% to 3%, which is consistent with the forecasted decline in annual burial volume.

On a consolidated basis, we project revenue to grow 1% to 3% including a negative foreign currency impact of about 2%. We are targeting modest adjusted EBITDA margin expansion of 30 basis points to 60 basis points in the Process Equipment Group this year, despite continued mix pressure and a challenging backdrop of tariffs and rising commodity prices. We are proactively taking steps to offset rising costs through pricing actions and productivity projects.

We are also strategically reinvesting in the business to drive profitable growth through product innovation, applications development, and better processes to operate our business more efficiently. As an example, we are advancing our procurement initiative, which we believe will generate significant annual savings as we improve infrastructure and processes to optimize procurement at a global level. At the same time, we anticipate growth in 2019 will be driven by lower margin large plastics projects, which comprise more than half of the backlog.

As Joe alluded to earlier, we expect significantly lower volume of separation equipment for proppants, which generally carry higher margins. As a net result, we still expect to increase margins in the Process Equipment Group, but the rate of expansion may be slower than our earlier estimates.

On the Batesville side, we are forecasting EBITDA margins to be approximately 21% for the year, down from 21.9% in fiscal 2018. In addition to ongoing volume and mix pressure, cost inflation remains a significant headwind for Batesville. We had previously expected some modest improvement in Batesville's margins going into fiscal 2019. However, we now anticipate higher costs for steel and other commodities compared to earlier estimates. The industry dynamics for burial caskets make it challenging to fully offset those increases with price, but we continue to take actions to aggressively manage costs to protect profitability.

GAAP EPS for 2019 is projected to be $2.40 to $2.55 and adjusted earnings per share for 2019 is projected to be $2.45 to $2.60. That adjusted EPS range reflects earnings growth of 1% to 7% and reflects a negative foreign currency impact of approximately 2%. Our adjusted effective tax rate is forecasted to be approximately 25% to 26%. Cash generation remains a top priority and our goal remains to deliver free cash flow greater than our net income.

Finally, I'll comment briefly on timing. We expect earnings growth to be more heavily weighted to the back half of the fiscal year. We anticipate some pressure to our first quarter based on the timing of large projects in the backlog and tough comps driven by separation equipment for proppants in last year's first quarter that we do not expect to repeat.

In addition, we anticipate elevated cost pressure on Batesville in comparison to the first quarter of the prior year. Also keep in mind, Batesville's revenue is affected by the seasonality of death. The largest quarter is generally the second quarter, driven in part by the severity of the flu season.

In summary, we are confident we can build on our strong results in 2018 and continue to drive profitable growth for Hillenbrand.

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

Joe A. Raver -- President and Chief Executive Officer

Thanks, Kristina. We had a strong finish to a year with record performance for Hillenbrand and we are excited about our positive momentum and the opportunities we have in front of us. Last December at our Investor Day, we shared our strategy to accelerate profitable growth. Since that time, we've made meaningful progress in a number of areas. Our teams have executed on organic growth initiatives that helped drive record revenue and order backlog in the Process Equipment Group. We've continued to see benefits in the Hillenbrand operating model as we focused the businesses on the critical few areas that can make the biggest difference to our long-term performance. We believe the operating model contributed to our growth and continued margin expansion in PEG and it has made all of our businesses stronger.

Another part of our strategy is to accelerate profitable growth with disciplined M&A. And we did not execute a strategic acquisition this year. That's something we need to do to build scale faster in our targeted platforms. We've upgraded our talent in this area and we are in a better position as an organization to execute a deal than we have been in a long time.

We also need to focus on shoring up the Batesville business following a year in which we faced operational challenges and significant cost inflation that constrained profitability. We need to take cost out and maintain volume to keep the business stable and producing strong predictable cash flow. We're working hard to leverage our operating model to help do that.

Clearly, we have work to do to make our business truly world-class, but that remains our objective. And we have tremendous opportunity before us. I believe we have the right people in place and our teams are focused on executing our strategy. We remain committed to our vision of transforming Hillenbrand into a world-class global diversified industrial company in creating long-term shareholder value in our second 10 years as a public company.

That concludes our prepared remarks. We're ready to take your questions. Operator, would you please open the line?

Questions and Answers:

Operator

(Operator Instructions) Your first question comes from the line of Daniel Moore from CJS Securities. Your line is open.

Daniel Moore -- CJS Securities -- Analyst

Good morning, Joe and Kristina. Thanks for taking the questions.

Joe A. Raver -- President and Chief Executive Officer

Good morning, Dan.

Kristina A. Cerniglia -- Senior Vice President and Chief Financial Officer

Good morning, Dan.

Daniel Moore -- CJS Securities -- Analyst

I'll just start on the Process Equipment side. Backlogs, once again up really nicely, 30% plus year-over-year adjusted. Yet, the guidance for revenue growth obviously implies a deceleration to the low to mid-single digits. You called out FX. I know mix is an issue, but maybe just talk about the other factors and whether -- whether or not there could be some conservatism in there. Do you see an opportunity set for your book and ship business to pick back up beyond what you're forecasting? Just help us kind of understand the puts and takes there.

Joe A. Raver -- President and Chief Executive Officer

Yeah, Dan, it's a great point that you make. And so I think one thing we've tried to communicate about the backlog is that these larger projects, the project timelines are elongating, and so more of the backlog is farther out in terms of the calendar. And that's really a function of both the entire supply chain being relatively full and our customers who are implementing these projects, they really drive the timeline. And so we have seen those push out as we've continued to do large projects. So I think that's sort of the biggest driver of the -- hey, the backlog has gone up significantly, but revenue is not going up from a percentage perspective as quickly. And so again, part of that is those projects are pretty far out.

In terms of the book and ship, we still do see strong markets and good markets in -- across most of our businesses, including the more medium-size projects for engineered plastics, and so there is a pretty solid book and ship business this year. And of course parts and service remain pretty steady, and we've had nice parts and service growth over the last number of years and we expect that to continue again in 2019. So if there is any upside to the plan that we had forecasted in place, it would be the book and ship business and it would be really linked to an end market that would accelerate more quickly than we're expecting at this point. So I think you hit the nail on the head. I can't predict what that end market might be. In the past, it's been proppants, it's been potash, it's been food, as an example. And so at this point, we're seeing the growth on the book and ship business that we have built into guidance, but it's difficult to predict where that might come in the future.

Daniel Moore -- CJS Securities -- Analyst

Helpful. And you touched on a couple of times the maintenance and parts and service. Where are we in terms of percentage of revenue? And maybe just kind of remind us of the margin differential versus the segment average and where that business could be three to five years from now.

Joe A. Raver -- President and Chief Executive Officer

Yeah. Let me have Kristina answer that question, Dan.

Kristina A. Cerniglia -- Senior Vice President and Chief Financial Officer

So Dan, right now, our parts and service represent about 33% of our total revenue. That's down a little bit from last year, in part because our capital business is so high this year. But what I would point out is that that service and parts business has grown double digits as well. So we're seeing better than market growth on parts and service. We continue to focus on parts and service and we continue to see better than market growth in that area of our business. So as you know, that's been one of our strategic initiatives to make sure that we're focusing on growing that business.

Daniel Moore -- CJS Securities -- Analyst

Helpful. And lastly from me, just shifting over to Batesville, thanks for the details as it relates to the fire. I think we had expected a little bit more of a rebound or recovery with some one-time events this past year kind of pointing toward the low 20%s in terms of margins. Is that -- maybe talk about the difference between how much of it is commodities and input costs, how much of it is just volumes getting more challenging to hold the line, and is 21% kind of the new norm to think about?

Joe A. Raver -- President and Chief Executive Officer

So I think you hit the -- really captured the essence of the Batesville challenge, which is, it's a volume and mix challenge that we face really every year and work hard to offset that with productivity and some pricing. I think what's additionally challenging this year is, we do see sort of much higher commodity cost increases than we've seen over the last number of years, and so we have that combination of things. And then, as you know, pricing in the industry is a bit more challenging in terms of recapturing that given the competitive dynamic, not only the competitive dynamic of the industry, but also what's going on with consumers in terms of the total cost of a funeral being relatively flat. And so that's the challenge for us exactly, which is, it's continuing to take cost out and be creative around offsetting volume and mix, and then we have, I think, the additional headwind this year with commodities. And Kristina, I don't know if you wanted to comment on anything.

Kristina A. Cerniglia -- Senior Vice President and Chief Financial Officer

No. I think that's right. I think commodities have a big impact to the business this year. If you remember with our steel, as an example, we have steel contracts in place to protect us from market pricing. We renegotiate those contracts in January. So we expect our steel prices to go up significantly from where we were this past year. And so when we think about where in the commodities are we facing pressure, we're facing pressure there. We're seeing the impact of tariffs. And so we're also not just seeing it on an indirect side from steel, but we're seeing the tariff impact on our textiles. And so we're also seeing some inflation in wood. So I think across the board, this business is being faced with higher inflation. And as Joe alluded to in his prepared remarks, it's much more difficult to capture that inflation with price.

Daniel Moore -- CJS Securities -- Analyst

Got it. Thank you. If I have any follow-ups, I'll jump back in. Thank you.

Joe A. Raver -- President and Chief Executive Officer

Thanks, Dan.

Operator

(Operator Instructions) Your next question comes from John Franzeb from Sidoti. Your line is open.

John E. Franzeb -- Sidoti & Company -- Analyst

Good morning everybody. I'd like to start with the backlog profile at PEG. You mentioned that the supply chain is full and that the deliveries timing has been elongated. I guess two questions. One, does the -- elongation of delivery times, does that signal confidence by your customer base or maybe conservativism or nervousness on the customer base that they just want to push things out a little bit, so they get a feel for how the macros play out?

Joe A. Raver -- President and Chief Executive Officer

Yeah. John, I think -- that's a great question. And I think it signals confidence from our customer base. And so these are large multi-billion dollar projects, and it's a lot for us, but we are relatively small part of that very large project. And so they're continuing to announce new projects and begin new projects around the globe. And so I think the longer lead times are really a sign of confidence that the overall demand for plastics and the need for capacity will continue to increase for the next several years.

John E. Franzeb -- Sidoti & Company -- Analyst

Got it. And you said the supply chain was full. What does that say to your capacity utilization in process?

Joe A. Raver -- President and Chief Executive Officer

So yeah, capacity utilization for us, of course, there is a bunch of elements of that as we go through the process, all the way from engineering the system and the products to manufacturing them and then delivering, installing, and commissioning. So those parts of our business that are focused on the polyolefin market, so mainly our Stuttgart location where we're building the large extruders and the engineering group that serves that from around the world, as well as our material handling business in Germany, which also has engineering around the world, those businesses are pretty full. So we're getting good utilization in those businesses given that it's a robust market right now, there are a lot of projects out there, and so those -- both from an engineering perspective and a production perspective, those parts of our business are at high utilization right now.

John E. Franzeb -- Sidoti & Company -- Analyst

Perfect, Joe. Okay. So when we think about the 30 basis points to 60 basis point EBITDA margin expansion, how much of that is leveraging the higher volume versus your ability to push through higher prices in a rising commodity environment?

Joe A. Raver -- President and Chief Executive Officer

Yeah. So I would say, the biggest driver of the range for EBITDA expansion, it's really the mix of business. And so if you think about those larger projects that we're doing, they tend to be lower margin businesses, and mainly because there is a lot of buyout in those parts of the business. So we do get some leverage on that, but that's really a pass-through margin. And so that brings the total margin down in the business. And then, as you would imagine, we do get benefit from volume in terms of more -- covering the fixed overhead in the business, and then the other places that we talked about is, we are getting procurement savings and expect continued procurement savings, and then -- and where we can, strategic pricing, which is a benefit as well.

John E. Franzeb -- Sidoti & Company -- Analyst

Joe, help me out. These long projects, are they fixed-price projects? Do you have any escalators built in for commodity costs or how does it work?

Joe A. Raver -- President and Chief Executive Officer

So on the larger projects, what we typically do is -- I believe it would be called a fixed-cost project, but what we'll do is when we sign that contract with a customer, and let's say the delivery is four or five quarters out, we will do a little bit of hedging to ensure currency et cetera. We'll then go place the orders for a lot of these long lead time and the large items, I mean, just as an example, a very large motor from, maybe $1 million or $2 million as part of the project, we'll also place the order for a very large gearbox that may cost several million dollars as part of the project. So we'll lock in as much of the pricing as we can on all the components to make sure that we're matching our expected costs with the actual costs that we're going to incur as the project goes on. So we don't do that for 100% of the project, but we do that for as much of the project and some of the larger cost items that we can on each project.

John E. Franzeb -- Sidoti & Company -- Analyst

Great, perfect. That helps a lot. And just on the tariff discussion, you said 1% of expenses. Is that cost of goods sold or total operating expenses? And can you just -- maybe a little bit on Batesville alone, on what the tariff impact is there. I was a little -- I'm a little unsure about how that plays out.

Kristina A. Cerniglia -- Senior Vice President and Chief Financial Officer

Yeah. So John, this is Kristina. As it relates to expenses, it's really on our cost of goods sold. So think about anywhere between that 1% represents between $10 million to $12 million approximately. Half of those -- that impact is on Batesville.

Joe A. Raver -- President and Chief Executive Officer

And that's half of the dollar impact.

Kristina A. Cerniglia -- Senior Vice President and Chief Financial Officer

Half of the dollar impact, yeah.

John E. Franzeb -- Sidoti & Company -- Analyst

Okay. And where does Batesville incur the tariff impact? Is it -- I don't want to answer for you.

Joe A. Raver -- President and Chief Executive Officer

No. So Batesville -- Batesville's tariff impacts -- so there is the indirect, which we've talked about, which really is -- the big driver is steel. We buy all domestic steel, but as you know, prices for steel went up once the tariffs went in place. And then the other places that Batesville fuels it is most of our fabrics that go into casket come from China. We have another amount of smaller items that have more handy work. So think about cremation urns, think about some of the elements of our hardware that may have hand painting on them et cetera. And so some of those smaller items that have a lot more labor content coming from China. And so those are the places where you're seeing the direct impact of the tariff on the Batesville side of the business.

John E. Franzeb -- Sidoti & Company -- Analyst

Got it. That was helpful. And one last question. Kristina, what's the difference between the GAAP EPS projection and the adjusted EPS projection?

Kristina A. Cerniglia -- Senior Vice President and Chief Financial Officer

Yeah. That would be restructuring items. So we have a care -- we have some carryover from projects that we had this year that we will be still taking charges for next year and then a couple of minor other typical actions that we would normally take during the year.

John E. Franzeb -- Sidoti & Company -- Analyst

Okay. And that's going to be first half weighted or equally weighted for the year?

Kristina A. Cerniglia -- Senior Vice President and Chief Financial Officer

You can assume that it'll probably be equally weighted throughout the year.

John E. Franzeb -- Sidoti & Company -- Analyst

Perfect. Okay. Thank you, everybody. I'll get back into queue.

Joe A. Raver -- President and Chief Executive Officer

All right. Thanks, John.

Operator

Your next question comes from Jamie Clements (ph) from BRG. Your line is open.

Jamie Clements -- BRG -- Analyst

Good morning, everybody.

Joe A. Raver -- President and Chief Executive Officer

Good morning, Jamie. It's nice to hear your voice.

Jamie Clements -- BRG -- Analyst

I appreciate that, Joe. So your commentary on -- by M&A multiple inflation, obviously everybody is saying that, as well though as it sounds like some Hillenbrand, Inc. staffing additions maybe over the last 12 months. In terms of the multiples in the areas that you have been looking at, is it strategics? Is it financial buyers or a mix that you think have kind of driven things up?

Joe A. Raver -- President and Chief Executive Officer

Yeah. I think it's both, Jamie. I mean, that's really hard to tease apart. We are seeing high multiples both on the strategics and the financial buyers. There is a lot of capital out there looking to be deployed. I think it's been pretty consistent the last few years, where, as we're looking at acquisitions, there is typically both kinds of buyers involved in the acquisition. And it's a -- that's a pretty full multiple that people are paying. We're much more focused on our M&A efforts, I think, than we were, say, a couple of years ago. And so we're really looking at M&A transactions that would be very sort of strategic to us, which means that we need to get some synergies to make those work and to be able to get to the payback for the shareholder or the return on invested capital for those deals given multiples. So that's sort of what we're seeing in the market right now.

Jamie Clements -- BRG -- Analyst

And without putting you to it, I mean, is it possible that you need to see interest rates go up a little bit more and maybe global growth to slow a little bit to really start putting a lot of money to work, or do you think that there are some potentially compelling options nearer term where the synergies may well offset, which -- what might look like a (inaudible) headline multiple?

Joe A. Raver -- President and Chief Executive Officer

Yeah. So I really obviously don't want to signal anything, but what I would tell you about our capital allocation strategy is, we have a very strong balance sheet, a strong credit rating. And so we do have the ability to invest through the cycle. So I mean, I think that's one of the things that is a strength of our company is, even if there -- the downturn comes in either the overall market or a segment of the market, we do have the ability to go ahead and invest in the downturn because we have a strong balance sheet. So we're looking at opportunities that -- it's difficult to predict when one will actually sort of be consummated, but we're looking at opportunities that are both, well, that would be good in almost any market environment. Let me put -- available to us or we have the capability to do it in any market environment. But again, we'll be disciplined, right? We get paid on getting the returns. So we'll make sure that we're disciplined and do a deal that's good for shareholders.

Jamie Clements -- BRG -- Analyst

Yeah. No, I appreciate that. I just think that one of the reasons why the PEG group is what it is today is because, you know, if you go back over the last decade, you had capital to invest when a lot other people were pretty scared. So I was just wondering if that -- when I think about the next 10 years, whether that might play out again.

Joe A. Raver -- President and Chief Executive Officer

Yeah. So I think the point about being able to invest through the cycle, you're exactly right. So some of our first deals which were very good, they were in the down cycle, and we were able to invest when other people were not -- did not have the financial flexibility perhaps to do that.

Jamie Clements -- BRG -- Analyst

Yeah. All right. Thank you very much for your time. I appreciate that.

Joe A. Raver -- President and Chief Executive Officer

Thanks, Jamie.

Operator

(Operator Instructions) Your next question comes from Daniel Moore from CJS Securities. Your line is open.

Daniel Moore -- CJS Securities -- Analyst

Thanks for another quick crack. Two things. One, just in terms of the -- putting more granularity around the guide, I assume given -- looking at Q1 given the seasonality in Batesville as well as you won't be really putting in price increases till January, we'd probably be looking at further sequential declines maybe something sub-20% in terms of margin. Is that kind of a ballpark way to think about it?

Kristina A. Cerniglia -- Senior Vice President and Chief Financial Officer

We're definitely going to have pressure in the first quarter year-over-year for Batesville primarily because of inflation. And so we're going to see much more inflation in the first quarter than we did last year first quarter. So to your point, will it be below 20%, it's probably a pretty decent assumption.

Daniel Moore -- CJS Securities -- Analyst

Got it. And then one other in terms of capital allocation. Obviously M&A is a priority. I know you've kind of restructured your processes. At the same time, the -- your balance sheet continues to get better every quarter, about a turn of leverage or so on a net basis, you bought back 1.4 million (ph). What's left in the current share repurchase authorization, and if the market gave you an opportunity, maybe any color on how aggressive you might be next year relative to this year as far as buybacks are concerned.

Joe A. Raver -- President and Chief Executive Officer

Yeah, Dan. I'm looking at Kristina. I think we have $40 million.

Kristina A. Cerniglia -- Senior Vice President and Chief Financial Officer

We have about $40 million left. Yeah.

Joe A. Raver -- President and Chief Executive Officer

In the repurchase authorization. And then we're sticking with our capital allocation strategy. Of course, we'll buy shares back to offset dilution, but given that our leverage or our debt to EBITDA ratio is below sort of our targets, we'll look to buy shares back opportunistically in the marketplace if we think that's the prudent thing to do given everything else that's going on. So yeah, so if we don't do an acquisition, if we don't deploy funds to M&A, of course, we'll fund the dividend and then -- and look to buy shares back during the course of the year.

Kristina A. Cerniglia -- Senior Vice President and Chief Financial Officer

Yeah. But our strategy is also to repurchase shares to offset dilution.

Joe A. Raver -- President and Chief Executive Officer

Yeah. That's right.

Kristina A. Cerniglia -- Senior Vice President and Chief Financial Officer

Yeah.

Daniel Moore -- CJS Securities -- Analyst

Okay. Appreciate the color once again.

Joe A. Raver -- President and Chief Executive Officer

Thanks, Dan.

Operator

Your next question comes from John Franzeb from Sidoti. Your line is open.

John E. Franzeb -- Sidoti & Company -- Analyst

Yeah. I guess I just want to go back to the comments you said, Joe, about the pump business had good growth in the fourth quarter. I assume that's the industrial side, not the municipal side of that business. And can you just maybe give us an overview of what your expectations are for pumps and valves embedded in your 2019 outlook?

Joe A. Raver -- President and Chief Executive Officer

Yeah. So you're right, well, so on the flow control side, we're having -- we're seeing strength on the industrial side of the business. It's less growth on the municipal side of the business. We've seen mining slow down a little bit. So it's really industrial water and waste water that's driving growth on the flow control side of the business. And that's where we're looking for growth in 2019 as well. So relatively modest growth on the municipal side as funding is challenged in the municipalities, there is less EPA funding and oversight, so there's less -- less of the things like consent decrees that are driving investment at the municipal level. And so we've been more focused on the industrial side and expect sort of -- kind of mid-single digit growth on the flow control businesses in 2019.

John E. Franzeb -- Sidoti & Company -- Analyst

So I mean, Houston just funded a bill over the summer to do no drainage system. When there's something like that, will you participate in something like that in the future? Is that -- does the business not to sell those kind of pumps?

Joe A. Raver -- President and Chief Executive Officer

So we would participate in a project like that on the valve side. And to your point, we are -- some of the municipal projects we are seeing really, like we're seeing projects pop up on the East Coast. So there's been a -- there's a -- once there are some storms and there are issues, there is a call for more infrastructure to handle mainly storm water. And so those kinds of projects do pop up for us and those are the places we're seeing projects where it takes almost like an event to -- for a region or a municipality, so we absolutely have to do something because their infrastructure is inadequate to handle these kinds of situations.

John E. Franzeb -- Sidoti & Company -- Analyst

Got it. So North Carolina needs work and South Carolina doesn't. So you've -- it will take some time for you to see some of that business.

Joe A. Raver -- President and Chief Executive Officer

That's right. But we've seen some projects that haven't been awarded yet, but we've seen projects popping up along the East Coast based on some of the challenges that the East Coast has faced with storms this year.

John E. Franzeb -- Sidoti & Company -- Analyst

Okay. Got it, Joe. Thanks for your comments.

Joe A. Raver -- President and Chief Executive Officer

Thanks, John.

Operator

There are no further questions at this time. I now turn the call back to Joe Raver.

Joe A. Raver -- President and Chief Executive Officer

I want to thank everyone for participating in the call today and we look forward to speaking with you again in February when we report our first quarter results for fiscal 2019.

Operator

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

Duration: 51 minutes

Call participants:

Rich Dudley -- Director of Investor Relations

Joe A. Raver -- President and Chief Executive Officer

Kristina A. Cerniglia -- Senior Vice President and Chief Financial Officer

Daniel Moore -- CJS Securities -- Analyst

John E. Franzeb -- Sidoti & Company -- Analyst

Jamie Clements -- BRG -- Analyst

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