Hubbell Inc (HUBB) 2003 Q1 法說會逐字稿

Good afternoon. My name is Christine, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Hubbell first quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer period. If you would like to ask a question during this time, then please press "*", then the number "1" on your telephone keypad. If you would like to withdraw your question, press the pound key. I would now like to introduce Mr. Tom Conlin, Vice President of Public Affairs. Mr. Conlin, you may begin your conference.

Thank you Christy. Good afternoon everyone. As Christy mentioned, this is the earnings conference call for Hubbell for the first quarter of 2003. Before we get started with the specifics, I'd like to mention my usual two notes. The first is that this call is being simultaneously Webcast on Hubbell's corporate Internet site. And it will be archived there two hours following its conclusion and available for the next year. Anyone who wants to re-listen to it or those of you who would like to -- excuse me, who may miss it today, can hear it on the Hubbell Web site. The second thing, I'd like to note, is that each of you should refer to the paragraph in the press release concerning forward-looking statements. And note that those sub-statements in that press release or maybe made here verbally today should be carefully interpreted under the terms of those forward-looking statement requirements.

With that let me introduce the people with me today. Tim Powers, President and CEO of Hubbell and Bill Tolley as the Chief Financial Officer of the company. And I will turn the conference to over to Tim Powers to start.

Thanks Tom. I'd like to begin this afternoon by talking a little bit about the economy and our market. As indicated in our press release, I said that each succeeding month in the first quarter saw Hubbell orders decline successively. We began with a pretty good January, but February and March thereafter got a little bit weaker. As a result, I think the indecision and the pushing off of decisions caused by our country's entering the war with Iraq primarily. For macro view I would say that most of our markets are still in a tight cost control mode. Factory utilization, as regard our industrial business, is still at a very low level and any need for additional capacity is almost nonexistent.

The consumers are very narrowly tapped out with very little pinup demand and spending. Access to capital is very tight and limiting the ability of many small companies to borrow perhaps for their additional capital needs. Corporations like ourselves continue to deliver in reducing that instead of investing due to this excess capacity. The government sectors are running deficits and in the short term this is providing some additional demand to companies like Hubbell. Our forecast is a gradual but even-recovery as the year proceeds. If I review the markets by individual segments, right now, our industrial market is down, but MRO spending is flat and I believe, trending upward. Nonresidential construction is down, residential construction is flat and still very strong, and our utility business is down for reasons sighted that utilities are facing a major need to restructure the finances and non-performing assets on their balance sheets, so as a result they have curtailed capital spending.

Our first quarter reflect a 39 percent increase in sales primarily caused as a result of acquisitions during 2002. If you were to compare our business as though you owned all of those acquisitions at the first quarter of 2002, on a comparable brand basis were down 4 percent. Earnings per share is 36 cents and when adjusted for $1 million of restructuring expense this year, and about $700,000 of restructuring or one-time income last year's first quarter, the comparison is 37 cents versus 32 cents in 2002. We continue to make progress on our inventory reduction program. Although, a little bit slower, $5 million during the quarter, and net depth was reduced from a $167 million at yearend to a $154 million even after we paid about a $19.5 million cash dividend. So those are the highlights and I will turn it over to Bill Tolley for further discussion of our financial results. Bill.

Thanks Tim. Hello everyone. I will start with the summary of the that affected the first quarter comparisons. This year's first quarter included just over a million dollars of restructuring expenses that could not, under the accounting rules, be reserved as part of the provision we established at the end of last year. Last year's first quarter included $700,000 of pre-taxed income, the components of that are $1.4 million pre-tax gain on the sale of business offset by $700,000 of restructuring expenses. And finally, as you may recall last year's first quarter included a charge of $25.4 million for goodwill impairment under FAS 142. As Tim said, if you adjust for all of these items, comparable first quarter earnings per share were 37 cents this year compared to 32 cents last year. The pre-tax operating margin overall for the quarter again excluding the restructuring expenses and the gain on the sale of business last year was 8.3 percent down to tenths of a point from 8.5 percent last year.

Some comments on the segments. Electrical segment sales for the quarter at 312 million up substantially as Tim said due to the LCA acquisition which closed in April of last year. Comparable sales, that is again including the sales of acquired businesses in both periods were down about five percent year over year. Our international businesses, higher levels of activity in Canada were offset by lower levels of activity in Mexico. The segment operating margin for the quarter 8.6 percent down three-tenths of a point from last year's 8.9. Within the segment, wiring device sales were up very modestly, most of the increase coming from additional commercial volume. Industrial and maintenance and repair sales were essentially flat. The operating margin in the wiring device business was also essentially flat year over year.

As has been the case for the last several quarters, electrical product sales and margins were up year over year but only modestly up this quarter due to a slower retail sales growth figure and a rougher winter for construction - hazardous product sales and margins were also up year over year, nice gains at our Hawke Cable Glands business which was acquired in February of last year, and finally our combined lighting business sales were down 8 percent year over year due to weaker commercial and industrial activity partially offset by continuing strong growth in the residential business.

Power system segment sales 79 million for the first quarter, down two points year over year. As Tim said, constraint maintenance spending by utility customers and delays in T&D project spending. We also didn't enjoy the same level of winter storm related repair sales as we did in the first quarter of last year. On the first quarter segment operating margin 8.1 percent, almost a full point lower than last year, due mostly to the one-time start up costs incurred to integrate the pole line hardware assets we required from Cooper industries like last year.

And finally our third segment, Industrial Technology, recorded a flat first quarter sales year over year. The GAI-Tronics business again reporting a very healthy increase offset by lower activity levels in the businesses that serve heavy industry and high voltage testing instrumentation markets. The first quarter operating margin for the segment improved by 1.7 points year over year, as the benefit of higher sale with GAI-Tronics dropped through to the income line and cost cutting actions offset the lower heavy industrial sales. Our effective tax rate for the first quarter was 26 percent, and as we indicated during last call about 3 points higher than last year due to an increase mix of US taxable income. During the quarter, Tim mentioned in his remarks we continue to generate substantial free cash and net debts dropped by 30 million after paying out the quarterly dividend of 19.5 million.

The net debt to capital ratio at the end of the quarter was 15 percent down to 1 point from the end of the year. We continue to make progress on improving working capital efficiency, net inventory dropped by 5 million. Our accounts receivable balance grew during the quarter as it typically does I might add at the end of the first quarter in previous years but average day sales outstanding DSO for the quarter improved by one day, and our accounts receivable ageing also continues to improve. During the quarter we used $5 million for capital expenditures, compared to first quarter depreciation expense of $30 million that has been and will continue to be a source of cash flow as we move forward. And, just one more note on the lighting restructuring program.

As we had indicated during our last call, several actions that we expect to take during 2003 have not yet been announced and were therefore not reserved as part of the fourth quarter provision for the lighting restructuring. We will continue to recognize costs related to the actions as they are incurred in accordance with the accounting rules for restructuring events. And, with that I'll turn it back to Tim for some closing remarks.

OK. Thanks, Bill. So, what are we working on? We are working, given the economy that we're faced with adapting to the economic changes as they occur and we have reduced our employment a bit during the first quarter as a result of slower demand. We think we're right on track with executing the lighting integration and restructuring plan. We continue to pursue our productivity initiatives using the lean manufacturing approach. We are using that same technique to accelerate our new product development, and we continue to remain focussed on acquisitions. We expect, looking forward for the rest of the year, as I indicated a few weeks ago, for the second quarter to be about 5 cents lower than the rate it would take to make $2 and 5 cents and that translates into a 40 to 45 cents second quarter. And, beyond that we would not make any predications about the second half because our view is that this is a slow down primarily caused by the international situation and we would expect the year to improve as it goes forward.

So, we will take a wait-and-see attitude towards the second half of the year. Again, we will react to any changes as we see them occur. So, we feel pretty good about our situation with respect to cost, we're struggling along in the economy along with all other companies in our sector but we feel that we are focussed on the right initiatives and that they will bring us higher margins in the future which will pay dividends as volume increases. And, with that we will turn in over to the question and answer period.

At this time I would like to remind everyone, in order to ask a question, please press * then the number 1 on your telephone keypad. We will pause just a moment to compile the Q&A roster. Your first question comes from Michael Regan of Credit Suisse First Boston.

This is Dorothy sitting in for Michael Reagan. I just have quick question, I know that you gave us your sales in electrical were up 5 percent year over year including the acquisition in the prior year but I was hoping that you can give us the breakdown between the acquisition in your core business because we noticed that margins were a little bit lower than we thought they would've been and we are wondering if this is more from a impact of the acquisitions having a lower margin. Hello.

Go ahead, we are -- hello, can you hear us?

Yes, can you hear me?

OK, fine. I am not sure I fully understood your question but I will take a shot at it.

OK.

First quarter sales in the electrical segment on a comparable basis, that is had we acquired the business that have been acquired on January 1st of 2002 were down 5 percent year over year.

OK. And, can you just give us kind of a break out -- there is no way to give break out between what the acquisitions contributed and what core contributed, just because I don't know what core was in LCA, the year before so I can't kind of figure out that.

Well, we haven't in the past, provided breakdowns of core lighting versus LCA lighting but I can make a general remark that the core lighting business of Hubbell were down year over year on a comparable basis while the business that were acquired -- the lighting business that were acquired from LCA were actually up in terms of sales year over.

Great, and just the margins are a little bit lower than we thought, is that because margins on the LCA business are a little bit lower than margins on your core business?

This is Tim. I would say that the lighting business has lower margins -- little bit margins at the present time than our wiring device and electrical products business because we added a substantial amount of lighting revenue, I would say that even though that lighting revenue has got better margins than year ago it still brings the average down a little bit.

Got it, OK thanks very much.

Sure.

Your next question comes from the line of Jeff Sprague of Smith Barney.

Hi, good afternoon. A couple of things. I was -- first just on the issue of the electrical margins. It does appear that kind of there may be seasonality from Q4 to Q1 but in terms of the margin rates, but you know, if I look at the sales Q4 and Q1 in electrical, they were fairly stable and the margins were down over 200 basis points sequentially. Would you attribute that to anything in particular, I mean clearly I would imagine there is some price pressure but next may be other than dynamics you might point to.

Yeah, Jeff. It's Bill. Certainly price pressure is ever present, I wouldn't classify them the first quarter as any worse than it has been over the last year at least but we are constantly under price pressure. The thing that I would point to has being the single largest impact would the headwinds, the so called headwinds that we have been talking about with you in the past. We, like other companies, have higher pension costs, higher medical workers comp property causality insurance and other benefit costs arising at fairly rapid rate. And, those costs literally hit you on January 1st and we've had that for you in the past as being a full year annualized impact of 18 cents a share, so about 4.5 cents a quarter. And our biggest single segment obviously is the electrical segment, so they take more than half of the total headwind.

OK. Great. Actually on the issue of pension, given that in a priority as acquisition, but in the absence of something materializing in the near term, do you look at some additional pension contributions, share repurchase or do you just let the cash stack up?

Actually if you take a look at our 10-K, we are fairly specific in there in terms of making an estimate on contributions to our pension year. I would estimate it will be in the $20 to $35 million range of contributions to our pension this year and we were very specific in terms of our assumptions for pension expense and that is what gave rise to a 6 cent per share year over year increase in pension expense.

Right. But, would there be any benefit from additional funding, tax benefits or anything like that if you have additional liquidity?

You mean to make a greater than the range type of pension contribution?

Yes.

There would be some tax benefits, but it is our intention to make the top of our pension plans in accordance with both law requirements and what we think is an adequate way to fund our pension over the next several years, but maintain liquidity and flexibility for other uses.

OK.

And we are still focused on growing the business and looking at acquisition opportunities. So, we are in a mode of hanging on to our cash at the moment.

And, Tim, to the point about the MRO, would you point to any specific end markets or you are just generally seeing that pulling through distribution?

I would say the bellwether for that is to keep on an eye on what is happening with Grainger because as Grainger goes, goes MRO, and they were I think a little bit up in the first quarter and I would expect them to do better as quarters go forward and for us that's one of the bellwethers of how MRO spending is going.

Great. Thank you.

Again, I would like to remind everyone, in order to ask a question, please press "*". There is a number "1" on your telephone keypad. Your next question comes from Robert Cornell of Lehman Brothers.

Yeah, just extending the logic of the first two questionnaires, and I think Tim has said the orders got worse every month of the first quarter. What happened in April?

So far the rate of orders in April is about on average with February and March for the first 17 or 16 calendar days or whatever it is. So, there has not really been a lift in the order of pattern yet, but there is seasonality to the construction season which will affect for instance our outdoor lighting businesses and utility spending, even at a lower level construction crews haven't been able to get out in bad weather and certainly this was the time of the year when they begin to do that. So, there is a seasonality to all of this that begins in the second quarter, so we would expect the sales to rise somewhat in the second quarter.

Yeah, Tim and Bill and Tom too, both the prior questionnaires were focused on the margin issue and that certainly jumps out when I look at my numbers too. I mean the sales didn't miss by a much relative to what we were expecting, but margins certainly were wide and Billy explained some of that with the comments around headwind. But you look at Hubbell's margins typically, and the second quarter margin isn't normally that much different than the first quarter even though you do get the seasonal pop in sales as you say, I mean, so even to get from here to this 40 to 45 cents quarterly run rate you're looking at margins improving meaningfully off this quarter level. I mean what reasons do we have to believe that's the case this year?

Well, I would say this, even though our sales came in close to your expectations, they were much, much lower than our internal expectations and in fact I think it's fair to say we entered the quarter and entered the month of January thinking that we would have -- you know, a fairly substantial meeting in a mid to high single digit increase in sales coming off the fourth quarter or November to December runrates, and as the quarter unfolded, January actually was relatively good, but as the quarter unfolded February came in weaker than January, March weaker than February. We were chasing even though we took 2 percent of our work force out during the quarter, we were chasing the curve down in the level of activity down during the quarter, and that had its impact on operating margins for those segments which were most affected by the slow weakening during the quarter.

Yeah, just Bill, while you're on the phone. I mean, you also mentioned I think the idea that you've got further restructuring to do in lighting and under FAS 146 you are going to have run that through your operating results. I mean, what quarters are we talking about? What magnitude of numbers are we talking about? When you talk about earnings numbers now, do you include those expenses in the type of guidance you're giving?

I can't be too specific about which quarter for the remaining major actions, most of those actions relate to factory closures.

Yes..

I would guess most would be second half type of events, Bob, but that's just a guess at this point, it really depends on what date we make the announcement in many of these cases. The amounts we were quite specific on in the 10-K, we think that there is probably another $5 to $10 million of expense to hit the PNL this year, and all of our earnings projections as has been the case in the past, exclude the impact of subsequent restructuring whether it's lighting or any of our other businesses.

So that's 5 to 10 million of restructuring and lighting that now falls under FAS 146 provisions?

Everything falls now under FAS 146 provisions, yes.

Well, debatably, if you had the plan concocted on December 31st, you still could use a prior rule I think, but, you know ...

All of the remaining restructuring and actions that are to be announced will fall under 146.

OK, thanks gents, bye.

Sure.

Gentlemen, at this time there are no further questions.

OK, Christi, thank you for your assistance and thank all of you for joining us today.

This concludes the Hubbell first quarter earnings conference call. You may now disconnect.