Hubbell Inc (HUBB) 2003 Q3 法說會逐字稿

Good afternoon. My name is Brooke, and I will be your conference facilitator today. At this time I would like to welcome everyone to the Hubbell Incorporated third quarter earnings release 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, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Mr. Tom Conlin, you may begin your conference.

Thank you, Brooke and good afternoon everyone.

As Brooke mentioned, this is Hubbell Incorporated's conference call to discuss our third quarter results which were released this morning at approximately 11:00 o'clock. This call is simultaneously being Web cast at Hubbell.com, where it will also be archived under the Investor Relations tab. Just press the audio archives button. It should be there for the better part of the next year.

You can also hear a replay of this call by telephone which will begin two hours after the conclusion of the call, and will be available on that telephone replay until October 28th. The replay access telephone number is 706-645-9291, and the pass code for that replay is 3268456.

Let me also refer everyone to the paragraph in the press release on forward-looking statements and incorporate that paragraph by reference into today's conference call. Let me just summarize it quickly by saying that our discussions today as the press release may include forward-looking statements. These statements necessarily will depend on assumptions, data or methods that may be incorrect or imprecise because of known or unknown risks and other factors. That may cause our actual and future results to differ.

With that, let me introduce the senior management of Hubbell who are with me today, Tim Powers, CEO, and Bill Tolley, CFO, who will discuss our second quarter results and take your questions a little later. So we'll start first with Tim Powers.

Thanks, Tom.

I'd like to go back to the last conference call that we had and talk to the fact that we were discussing Hubbell's continuing adaptation to the market demand. And that demand was lower than we expected as we went into the year. So that in the first half of the year we were taking action to reduce our workforce to that demand that was a bit lower than we expected.

We also predicted that there would be no substantial change to our markets for the rest of the year. Maybe a little bit better in the second half than the first but no major move upward. And so far that's exactly what's happening.

We've seen the normal seasonal construction cycle increase as good weather happened in the third quarter, but no major movement in all of our markets.

The residential market continues to be strong with no sign of let up despite higher mortgage rates. The commercial construction market is still going down, but at a slower pace than the previous few quarters.

The industrial construction demand has bottomed out and has not begun to recover. And the maintenance and repair markets are recovering very slowly in line with industrial production.

Our utility markets are still weak, with no detectable change in demand for transmission and distribution infrastructure despite all the evidence of the need for that product.

The results, despite the flat market as we predicted, our third quarter was modestly better than the second. Driven by the seasonal strengths and the impact of first half productivity and workforce actions.

In fact the third quarter was better, 57 cents and 55 without unusual items, versus 49 last year without unusual items, or a 12% increase in earnings per share on a 3% higher sales.

We are focused on four initiatives that better support results. First cost reduction.

The lighting integration first and foremost, outsourcing, the second is working capital reductions, which involves accounts receivable, inventory and accounts payable, third becoming a lean company with improved processes in our factories, offices, and warehouse all improving productivity and just recently added, the implementation of a new enterprise-wide business system as we refer to Hubbell 2006.

As we recently announced, we continue to forecast on all four of these initiatives which position us for when the -- better for when the recovery happens. We are pleased to report that we have made good progress on all fronts.

The lighting integration is proceeding on target and within budget as we established a year ago. This involves factory closures, warehouse consolidations, and the elimination of redundant product lines.

We have started to see the bottom line benefit of those initiatives in the third quarter, margins are steadily improving. Outsourcing is growing, but remains less than 10% of Hubbell's total products.

Working capital reductions.

We continue to make progress on our goals for improving working capital efficiency. $17 million of cash from the reduction of inventory in the third quarter, which totals $47 million in the first three quarters of the year.

Days inventory has been reduced from over 80 days to 60 days at the end of September. We've also made progress on accounts receivable and accounts payable as well.

We continue to hold capital spending well below depreciation due in large part to our lean initiatives across the company. This allows our factory to free up substantial amount of space while increasing our ability to respond to the market upswing.

Of all these working capital initiatives, controlled capital spending combined with net income above our expectations allowed us to generate cash flow for the quarter of $100 million. $84 million of free cash flow in the third quarter brought our net debt down to $33 million and we now expect to be debt free sometime in the first half of next year.

The third initiative becoming a lean company.

Our lean initiative -- our lean process improvement initiatives continue to expand. We are pleased with the level of involvement and the benefits we are starting to see throughout the company. Becoming a leaner company has enabled to us achieve inventory and cost reduction objectives.

Finally, we are just starting to see new product development process improvements that deliver these new products on schedule and within budgets with a design that fits customer need and our cost objectives.

The Hubbell 2006 initiative will provide a strong information foundation which we need to be successful. We have been preparing for the groundwork for over a year and we are now ready to begin a 30-month phased implementation.

And now I'll turn the call over to Bill, who will provide more information on Hubbell 2006 and our third quarter results. Bill?

Thanks, Tim. Hello everyone.

Last Friday's press release summarized our enterprise-wide information systems initiative, which as Tim said we internally refer to as Hubbell 2006. There are several reasons why we want to have common standardized business software that's used across the company.

First, the vast majority of our sales flow through a common set of customers. Primarily electrical wholesalers, distributors, and also retail and do-it-yourself outlets. Having common software across all of those businesses or all of our businesses will allow us to have one face to that common set of customers.

Second, having common business software will allow us to standardize processes and standardize information. That in turn will enable to us reduce cost and be quicker adapt to changing market conditions.

Finally having common business processes and software will enable us to do integration of newly acquired businesses much more fast and much more efficiently.

As the press release indicated, we've completed the assessment and selection of software and we've formed a team of people from across Hubbell who are going to lead a multi-year implementation plan. We plan to implement each of our businesses in sequence as Tim said, after each successive implementation is up and running smoothly.

The next several months we'll focus on training and preparation for the first implementation, which is scheduled for the middle of next year.

We expect that the total cost of the program will be in a range of 35 to $50 million, spread over the next two and a half years. Of this total cost, we expect about 70% will be capitalized with the remainder to be expensed as incurred.

We expect a P&L expense in 2004 will be in a range of 8 to $12 million pre-tax, compared to a 4 to $5 million expense this year.

This project is very important for us. Offers long-term benefit across all of our businesses.

We believe that we're organized correctly, have the right resources applied to it, and are approaching it with all of the rigger and discipline that should be applied to a large complex project such as this. We expect that savings will start to benefit the bottom line in 2006, with full-year annual savings in a range of 14 to $18 million starting in 2007.

Turning now to the third quarter results, our reported third quarter earnings include a favorable patent infringement settlement and a favorable estimate adjustment associated with one of our lighting factory closures. Excluding those items our third quarter earnings would have been 55 cents a share, 2 cents lower than the 57 cents we reported.

Last year's third quarter results also included a 2 cent favorable impact from non-recurring items, excluding those items, last year's earnings per share was right in the middle between 49 cents and 50 cents a share.

Sales for the quarter were up 3% year-over-year, up 2% sequentially from the second quarter. Favorable foreign exchange rates accounted for about half a point of the 3% year-over-year improvement. All segments reported growth in sales.

The pre-tax operating margin for the quarter adjusted for restructuring costs and the favorable items we discussed a minute ago, was 10.7%. That's up by 1.8 points from last year and up a point and a half sequentially from the second quarter.

We are very pleased with this rate of improvement and we're also happy that all of the improvement was on the gross margin line. This, despite ongoing slow market conditions, continuing inventory reduction, and the head winds we've talked about all year long, pension, insurance, employee benefits, and more recently, Hubbell 2006 expenses.

All three segments importantly for us reported growth in operating margin.

Tim already talked about cash flow, it continues to be exceptionally strong. Record $100 million generated from operations and $84 million reduction in net debt in the quarter alone.

On to the segment results.

Electrical segment third quarter sales up 2% year-over-year, up 3% sequentially from the second quarter. Wiring systems sales were slightly lower, while rough-in and harsh and hazardous electrical sales grew by about 1%. Lighting sales year-over-year was above the average for the segment.

Operating margin for the quarter of 11% was a point and a half better than last year and sequentially from the second quarter. Pricing competition continues to be fierce in all of these markets and that in particular pushed operating margins lower in the wiring systems business and in the electrical products businesses.

Both of these businesses heavily affected by industrial and non-residential construction market weakness.

Operating margins in the lighting business continue to improve including very nice growth in the commercial and industrial side of the business. Despite very competitive pricing and generally flat market demand, the impact of the restructuring actions that have been taken to date, we believe, are starting to take hold.

Power systems sales for the quarter, $86 million, up 4% year-over-year, up 2% sequentially from the second quarter. As Tim already mentioned, and our release says, about $2 million of the third quarter shipments were attributable to Hurricane Isabel. Excluding that hurricane impact, third quarter sales would have been up about 2% from last year.

That to us just points to continuing slow market demand for the utility infrastructure products that we make.

Operating margin for the segment, third quarter 12%, also included that $1.6 million favorable legal settlement that I mentioned a minute ago. Excluding that favorable item, the third quarter operating margin was up but only modestly year-over-year. Pricing in this business also continues to be very, very competitive.

And finally, the industrial technology segment sales for the quarter, $32 million, up 5% year-over-year, but down about 6% sequentially from the second quarter. The GAI-Tronics security communications business continues to report very strong results, sales there up 9% with operating margin continuing to grow.

The other businesses in this segment were essentially flat on the sales line, and the third quarter operating margin for the segment, 9.5%, up about a point from last year, up close to two points sequentially from the second again due to the strength in the GAI- Tronics business and only a more modest improvement in the heavy industrial businesses.

Tim already mentioned that net inventories dropped by $17 million during the quarter. Days supply at the end of September was 60 days, that's down about five days from the second quarter end and down about 80 days or down from about 80 days at the end of 2002.

We think there's continuing opportunity to improve the number of days that we carry in inventory across all of our businesses. Reducing inventory does hurt our operating margin in the near term but it generates substantial cash flow and positions us very well for a recovery in market demand.

Days sales outstanding in receivables for the quarter held about 50 days, that's about one day better than last year but very similar to the second quarter.

Capital spending continues to run well below the level of depreciation expense, as we continue to have very little need for bricks and mortar and we free up additional capacity with our lean manufacturing activities. For the nine months capital spend was $17 million, versus a depreciation and amortization of expense of $40 million.

The third quarter effective tax rate was 26%, the same as the first half rate, and up three points from the 23% rate in the third quarter of last year.

In summary, we're quite happy with our second quarter results and we continue to believe that we're well-positioned for both a recovery in our markets and a continuation of our growth plans.

And now we'll turn the call back over to Tim for some comments on our outlook for the fourth quarter and for 2004.

Thanks, Bill. You meant third quarter results.

The outlook for the fourth quarter was that we expect a continuing slow recovery in our markets. We don't expect any trend line changes from what we've seen in the first three quarters and we believe that the earnings estimates of $1.85 to $1.95 are pretty much in line, this is excluding the lighting restructuring, in line with what we think we'll be able to perform.

We also expect strong cash flow to continue for the balance of the year and we expect to be in a net debt free position by the first half of next year.

On initial glance at 2004, if we review the individual markets, we would expect the residential market to continue to remain very strong but probably have peaked in 2003 and be down by around 2 to 4%.

We believe that the commercial construction market bottoms out late next year, meaning that we will continue to have a decline in the commercial construction market for two to three quarters of next year, perhaps even all of the entire year. The industrial market will begin to turn up by 2 to 4% as will, we believe, the utility markets.

So in summary, from a market position, we're not looking for any major upturn if you combine all the major markets that affect our sales. We're expecting revenues to rise in the range of 2 to 4%.

We will continue to focus on the four areas that I talked about, cost reduction, working capital reduction, becoming a better, lean company, and working on the implementation of our Hubbell 2006 initiative. We feel that we will add 100 basis points to our margins and that our earnings per share will grow between 8 and 12% on that 2 to 4% growth in sales next year, even though we are absorbing the increased cost of implementing our new business system.

So we're not expecting any major upturn, but we are concentrating on what we can control and we do feel we will make steady progress toward our objective of 13 to 15% operating margins. So that's our first view of 2004.

And with that, I think we're prepared to answer questions.

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

Thanks. Tim, margins in electrical were really much stronger than I expected and you said, I think, that wiring systems, and electrical products, yeah were both down. So just given the relative size, I mean, lighting must have had a huge quarter margin wise with margins up 300 basis points.

Mike, this is Bill, it's not quite that high. But lighting did have a very nice quarter both in terms of revenue growth and operating margin improvement year-over-year and sequentially, And the best news from our perspective was that it was including the commercial industrial side where, as you know, we've been reporting lagging results for the past couple of quarters.

How much was mixed and how much was sort of the underlying businesses getting better, just within lighting?

I can make some general comments on that in that the progress residential lighting business continues to grow at a faster pace than the commercial industrial businesses, but both sides of the house grew their sales. And operating margins on both sides of the house also improved by, let's just say well more than one point sequentially in year-over-year, both sides of the house, residential and commercial/industrial.

Got you. And it seems like given, you know, the success you're going to have this year, especially with margins, I think operating margins will look up 40 basis points, 50 basis points with volume still down, you know, 100 basis points next year on pretty good volume. I haven't worked through all the numbers but shouldn't you get a little more leverage than that or is it just the incremental spending on Hubbell 2014 or 6 that you're talking about?

We think it's really the incremental spending but we do think that we'll have some nice leverage. And you know us, we try to be fairly conservative in our viewpoint on these things.

Right.

Mike, we'll have -- not to throw a wet blanket on your assessment but we will continue to have what we've been calling head wind this year, again next year. Health benefits are continuing not just for us but the entire business world, running 10%, we'll have another much more modest year-over-year increase but another increase in pension expenses next year, and as I mentioned earlier, we'll have incremental P&L expense for the business systems initiative next year. Taking that all into account we still think we can hit the objectives that Tim talked about earlier.

Given the outstanding cash flow, Tim, what's the pipeline for M&A look like in this environment?

I would say there's opportunities. I would say there's nothing immanent at the moment, but we have the stated objective to grow at a substantial pace and we're working as hard as we can to get some of those opportunities to turn into reality. I can just -- I would like to do more deals, if I can find them.

Just given your success with the integration of LCA, you must feel pretty good about the organization's ability to execute, you know, on pretty substantially sized deals?

Yes. I am very confident in our organization's ability to acquire and integrate within the four areas that I talked about, I am very confident.

Terrific, thank you.

Yes.

Your next question comes from Bob Cornell of the Lehman Brothers.

Hi everybody. Just following up on Mike's question, I mean, it's nice to see lighting doing so well but you've been making pretty good progress in Hubbell electrical products over the last couple years after the issues with your southern competitor. I mean, those margins turning down now? Is there anything special going on in the marketplace that represents a return to some of the pricing problems we had a few years ago?

No. I would say it's tough pricing out there in, you know, the commercial construction market is in its second year of double digit decline. And it's just some tough price out there. But you know, I would say that we have the countermeasures in place to deal with that.

I am not concerned about margins over the long run in that business and I believe that margins will turn up next year for us on this modestly better volume. So we're doing a number of things internally to turn that around. And we're not looking for price to help us, for sure.

You know, Tim, you're pretty clear on your outlook and so forth, but a number of the companies we've heard report in this earnings season have said that September was notably better than some of the more recent months and that October was pretty good, too. I mean, did you see any of that in your own third quarter results?

I don't really get too excited from one month to the next because as soon as I have one good month and begin to get excited it's followed up on by not such a good month. So I really tend to look at how we do at sort of a three-month rolling or quarterly basis, and I would say that our markets are just about where we expected them to be, and I don't really see any upturn as predicted by all the general economic indicators.

I think the electrical sector is, you know, the construction end of the U.S. economy will be the last end or one of the final sectors out of this slow and stagnant period, just for all the reasons attributed to the utility market we've talked about, and their problems, and also regulation has not allowed that transmission distribution end to pick up yet. The commercial construction end is overbuilt so there are unique, you know, market specific factors which I feel will prevent any real surprise on the upside.

So if it happens, we're certainly poised to take advantage of that. We would be delighted by volume increases of double digits and prepared to profit handsomely from that but I don't feel that's the case nor would I want to have you believe that.

You know, on the business development front, I mean, you guys have so far, I think, been interested in adding significantly to areas where you have an existing position and knowledge base. Judging from the lack of a deal getting done one imagines that the targets are either not interested in being acquired or price is too high.

Does that suggest looking a little bit further afield? I mean, you built up the industrial technologies business, there are a lot of footprints in there, GAI-Tronics has done very well. What about looking a little bit further afield maybe than the four areas in the whole Hubbell business development activity?

Those four areas give us an opportunity -- huge opportunity and wide expanse, and that they're four areas that we know very well and we have product gaps that we'd love to fill by acquisition. We are staying with a disciplined approach in that if we can't find something in those areas we're not buying anything. Because these are the areas we know and understand. They're through distribution and DIY, and we know we can integrate these businesses successfully and we're not about to move from our strategy in the near term.

Fine. One other question. You talked about the margin advances being a function of the gross profit margin improvement. Could you shed a little more light on what's driving the gross profit margin? In other words, have the capacity reductions over the last couple of years resulted in a better aggregate overall capacity utilization rate or is it outsourcing? What's driving the improved gross profit margin on a macro basis?

It varies by business and I can tell you certainly capacity reduction has helped the lighting business, along with, in this restructuring, we are outsourcing some product lines. And when you combine the two, we're getting a tremendous lift in two or three of the product lines which were marginally profitable and now are up to double digits earnings. So we're getting both ends from outsourcing and from capacity reduction.

Lean is helping us dramatically. I think it's helping us on the floor space consolidation, it's helping us on the inventory reduction, and it's a little bit of a penalty, as you've heard a lot of our competitors talk when you're reducing your inventories at the rate that we're doing, you certainly have underabsorbed fixed costs during this time.

And I indicated in the press release that we're doing so we will on all this, that it is entirely possible we will have further capacity adjustments, meaning closing further plants in 2004.

You'd have to absorb that in your operating P&L these days.

Yeah, we will tell you exactly, quantify that for you, but it wouldn't surprise me to see cost in the range that we're experiencing now in, you know, $10 million a year for a couple more years to wring out all the capacity adjustments that come along with cutting inventory at the rate we have outsourcing and becoming more efficient.

It's just a lot more areas to improve, which is the good news, and we just have to get through it. We have lots of plans, lots of ambition to improve.

Is that $10 million, Tim, in the numbers that you and Bill and Tom were talking about for next year?

No they're not. We're just talking about -- they would be if you wanted to take this year's expected outcome less the one-time and compared to next year you would see an after-everything or a net-net of similar improvement of around 8 to 12% I would say.

Just for clarity, because I know this is a little open-ended, people are going to ask, I mean you said that the earnings outlook for next year, what did you say, would be up 8 to 12%. Does that 8 to 12% increase include, you know, the possibility of these further capacity reductions?

No it does not because we haven't gone far enough in our detailed planning of that to tell you what it means to us. What I'm just telling you in advance, that because of the success we've had in becoming more efficient and more lean, and reducing inventory, it provides us with the opportunity and the probability of further fixed cost reductions. And we will quantify that as we go forward.

Okay. Thanks.

Yep.

Your next question comes from Jeff Sprague of Smith Barney.

Good afternoon, it's Jeff Sprague.

Hi, Jeff.

Tim, could you first give us a little more color on what you see in the utility market? You know, you gave some down-beat comments and a lot has not changed but you did indicate that you see a little bit of a turn in the business next year. And I just wonder what you see underpinning that?

Well, I see what I would call the natural process of the utilities who are financially stressed and being successful in refinancing their debt being able to spend a bit more on capital than they have. Just because they've curtailed capital spending now for the better part of two years. So they will spend a little more, but they won't spend a lot more.

And until regulation takes shape, which will either guarantee or allow some kind of rate of return on transmission investments, we're not going to see the long-term uptick that I know this country needs to have. Because our transmission system, you could equate to our highway system, and once we passed the national gasoline tax and started to pour money into it, the system got better.

But right now we don't have a mechanism yet in the United States to restore and refurbish that system which is not what it needs to be, as we saw in the East Coast and that situation could reoccur at any time. But it's the successful refinancing of some of the public utilities which I believe will allow them to spend more money.

Do you get exceptional margin rates on kind of the emergency response, like responding to Isabel and things like that? Or is it kind of normal margin?

You get normal margins, and it's just that you get it to sell an exceptional amount of certain products in a short interval. So we have seasonal builds of inventory in preparation for storm seasons, and a very good track record in delivering service to any utility that needs those products.

And just a couple questions on the ERP implementation. Judging by Bill's comments, you know, that expenses 8 to 12 in '04, which is up from 4 to 5 in '03, it sounds like the entire 30% of the project that gets expensed is pretty much done in '03 and '04. Is that correct? Or is there ongoing --

I would say the majority of it, where you're really working on preparing to implement a new system, in other words, you're working more with your old system and getting data prepared cleaned up, straightened up, is more of the expense side, and as you have formed the model on your new system and you implement the new is where you begin to capitalize. So that is the case, I would say, the majority of the case.

And I think you said savings don't begin accruing until '06, '07? You wouldn't expect to see some benefits in the early stages of this? Or is that a -- you know, is that a cash-to-cash, you know, measure you're giving us there?

That's cash-to-cash, Jeff. We're going to be investing more than we save until we get into 2006.

Okay. And I guess what you don't expense you capitalize, I don't know if that has really a meaningful impact on what your Capex plans are but can you give us a view on what Capex and what that tension head wind you mentioned looks like next year?

Sure. Just to clarify, too, 70% or so of the total project cost will be capitalized but as soon as it becomes capitalized it becomes an expense item, as you depreciate that capitalized asset. So don't forget about that component.

No, that's right. And is that five-year amortization?

We haven't decided that yet.

Probably a little more than five?

Pension head wind, it's too soon to say where we're going to end up this year and what our assumptions will be but we think our 8.5% rate of return assumption is the right one and we'll probably be at or close to that next year.

Discount rates on the other hand have come down substantially and that's going to give us a bit of an increase for pension expense next year. But we talked about a 4 to $5 million pension expense increase this year versus last year. You're going to see an increase next year of less than half of that.

Okay. And do you have a Capex number for '04 in your mind at this point?

I would say that it will be at a clearly higher rate than we're expending now but not exceeding depreciation. As we capitalize some of the software we purchased, we also are seeing incremental needs to invest in new equipment and more tooling to support the development of new products. So we are raising the bar on capital spending incrementally, but certainly not spending beyond, at this point, depreciation.

And I guess just back to Bob's question about M&A and your answer about kind of sticking to the, you know, strictly to the strategy, at what point do you start being concerned that too much cash might be piling up and you redeploy it some other way, share repurchase or the like?

We're not too close to that concern yet. Right now, we're just focused on trying to get back to net zero. And we are keeping our options open but it's not anything that's pressing us in the short term.

Maybe another way to ask it, I mean, net zero is probably not the ideal capital structure for your company.

I wouldn't suspect that we will be in that sustained position very long.

So you feel decent about the pipeline, then?

Possibly, yes.

Okay. All right, thanks a lot.

Sure.

Your next question comes from Martin Sankey of Neuberger Berman.

Thank you. Hi.

Hi, Martin.

Just two quick clarifications and then a real question. I missed the third quarter Capex and depreciation.

I didn't give a third quarter figure, but go on to your next question and I'll get it for you, Martin.

Okay. The other clarification is the patent settlement gain. Does that show up in cost of goods sold or SG&A?

Cost of goods sold. Generated about a half a point of gross margin benefit that would be non-recurring. Martin, for the quarter, capital spending was just under $5 million.

Uhm-hmm. And depreciation?

Depreciation and amortization together for the quarter, $13 million, very similar to the first two quarters of the year.

Okay. And now, my real question. You've been extremely successful in reducing inventories and while you have mentioned that underabsorption is an issue, there's a flip side, which should be benefiting you, to wit: Are you penetrating LIFO layers and getting liquidation credits from that?

The short answer is not substantially yet but as we continue to reduce net inventories, we will dive in potentially to some layers that would generate book basis income.

But we have not reached that stage yet?

Nothing substantial yet. That's a 2004 and '05 more of an issue than '03.

Okay. Thank you.

Sure.

Your next question comes from Boyd Poston of A.G. Edwards Asset Management.

Most of my questions have been answered. Capex is equal to depreciation next year. What is that number, roughly?

It should be below depreciation, and depreciation will be --

We're running 13 a quarter, so roughly 52, $53 million will be our run rate for depreciation and amortization this year.

And the incremental pension healthcare hit during the third quarter, was it about 5 cents like the second quarter?

I want to clarify, the second quarter impact was not 5 cents for pension alone. We've been talking all year long about the total concept of head wind, pension, health benefits insurance and the like has been about 5 cents per quarter. And the third quarter was not different or not anywhere substantially off that 5 cent per quarter number that we've been quoting in the past. But that 5 cent per quarter includes other items other than pension.

Okay. Thanks.

Sure.

Again, I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone keypad. Your next question is a follow-up question from Michael Regan of Credit Suisse First Boston.

Thanks. Tim, I was wondering if you can give us some additional insight into your outlook for commercial construction next year? You had said that you expected to be down really through at least the first two, maybe even the third, maybe even the full year and yet I would say the tone that we've heard from several companies supplying the commercial construction market seems to be better with one even saying that they're seeing positive orders for the first time in a while. So I'm just wondering, what you're seeing if you can give us some additional clarity on that?

Well, we followed Dodge and some of the most reputable forecasting sources for that market, and we observe what's happening to us in our products that serve the commercial construction market. We just believe that the overcapacity in the large urban areas of the United States with respect to office space and commercial retail space will not be absorbed anytime soon.

It is the fact that we've lost this many jobs in the U.S. office worker jobs, New York metropolitan area is one example. When will all that space be consumed at a rate fast enough which will trigger an increase in the start of new buildings in New York? That's just one example.

And I don't see enough of that in the top 20 markets to overcome the regional -- there are regional places in the United States where, let's say, growth continues pretty much unabated which would be Florida and Southern California and Arizona to name a few. But if you take the bigger cities, I think their slowness outweighs some of bright spots.

I can see a declining rate, and if you believe the forecasts that we're seeing now where we're saying mid single-digit declines in the first two quarters, about a breakeven in the third and a slight uptick in the fourth. All that adds up to a small minus for the year. But you know, those are forecasts.

But I can tell you right now that it is not a boom. I don't see where the strong surge in this area would come from or what the impetus would be. I just don't see it.

Mike, if you take a look at the major metro, whether it's office or retail, look at the major metro vacancy rates and lease rates. They're still -- while it's better than it was six or nine months ago, they are still substantially higher than normal vacancy rates and substantially lower than normal lease rates. And we track that quite carefully. That's one of the reasons, other than what the forecasters are telling us that we feel the way we do about 2004 non-residential construction markets.

Well, and you guys have been more right than wrong over the last couple years, I was just trying to get a sense of, you know, kind of what the macro things you were looking at.

We would like to have better news, we would like to have a better forecast, we just don't see the impetus behind such a significant upturn.

Thank you.

Sure.

Your next question comes from Roman Janacob (phonetic) of Mass Financial Services.

Hi guys.

Hello.

I have just a housekeeping question. In the press release you talk about one-time items $1.8 million and $2 million. Is my understanding correct that all the $1.8 million is part of cost of sales while the $2 million number is below the operating profit line?

The $2 million figure that was quoted for the third quarter of last year?

Yeah, so just tell me about both, if you can, please.

Well, the two -- let me go through the third quarter of last year. $2 million pre-tax it's a reported gain on the sale of business so that's non-operating, and the credit resulting from the net of expenses and a reversal of a reserve under capacity reduction program, that is also a portion of our restructuring item and therefore, is non-operating.

All right.

The $1.8 million pre-tax this year, combination of the legal settlement that we talked about earlier and a favorable estimate adjustment under our restructuring program which is non-operating. So a portion of the third quarter '03 unusual items is operating and then cost of sales as we talked about, that's where the patent infringement settlement dollars are and a portion is below the line in non-operating.

And what is the amount that is operating?

Which quarter?

In this quarter?

This quarter.

Do you have that?

All items are included in operating income.

Okay. So $1.8 million is all of it part of cost of sales? Or is part of -- or is there a portion of it that is part of SG&A? All cost of sales.

All cost of sales. Okay. Thank you very much. Sure.

Thank you. At this time, there are no further questions. Gentlemen, do you have any closing remarks?

We thank you for your interest in Hubbell. Our next call will be our fourth quarter full-year earnings on January 20. Thanks for your interest.

Thank you.

Thank you. This concludes the Hubbell Incorporated third quarter earnings release conference call. You may now disconnect.