Hubbell Inc (HUBB) 2004 Q4 法說會逐字稿

Good afternoon. My name is Patrice, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Fourth Quarter and Full-Year 2004 Earnings Release Conference Call.

All lines have been placed on mute to prevent any background noise. After the speaker's 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 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you.

I would now like to turn the call over to Mr. Tom Conlin, Vice President of Public Affairs. Please go ahead.

Thank you Patrice, and I would like to thank everyone for joining us this afternoon. We'll follow our usual procedure here; a few preliminary comments from me, and then we'll turn to the matter at hand. This call is being simultaneously webcast on the hubbell.com website, and it will be archived there for at least the next year. If you want to revisit the call through the web, go to the Hubbell website, hit the Investor Information tab, then Audio Archives tab, and you'll be able to hear the entire call. The call will also be available for replay by telephone.

Following the call, it will take 2 hours to archive it, and then you can reach that telephone replay by dialing 706-645-9291, and you'll need the replay pass code number, which is 3411320.

I would also like to refer everyone here on the call to the paragraph in the press release regarding forward-looking statements, and we will incorporate that paragraph by reference in today's call. It discusses forward-looking statements and the assumptions that are inherent in them. They involve known and unknown risks and other factors that may cause our actual or future events to differ from our expectations, which we may discuss here today.

Now that that's out of the way, we will also follow our customary procedure. With me today is Tim Powers, CEO of Hubbell Incorporated; and Greg Covino, Interim CFO of Hubbell Incorporated. We'll turn first to Tim.

Tim?

Thanks Tom. We are very satisfied with the fourth quarter and full-year results. Starting with the year, 2004 represents a major step forward toward our longer-term goals, best in class goals.

I'm very pleased with our 13% year-over-year growth, with about 10% in real volume gain as operating margins of 11.5% before restructuring charges represent over a point operating margin improvement versus 2003, and our earnings per share growth of 31%. I am able to report that we achieved all of these financial objectives we set for ourselves as a management team approximately one year ago, including the spending objectives and implementation progress of our new SAP business system.

I will discuss 3 key points for the fourth quarter in further detail. First, Hubbell 2006. In the fourth quarter we took a major business live on SAP on time and on budget. As a fully integrated system, SAP has and will have an extremely positive impact on the way we transact business, including the reliability and timeliness of information and daily transaction discipline.

To-date, I am pleased with the work of our team and the functionality of the system. All major business processes have been implemented and are working fine. There are many changes to the way people do their jobs, a large part was addressed with training, however a portion of which can only be satisfied with real-time experience and practice. This sizable learning curve impacted our plant productivity and our sales by $2 million of operating profit during the quarter. We are making steady daily progress on that learning curve, and I would expect that our first quarter will be back to normal.

Further, although spending on Hubbell 2006 was in line with our expectations for the year, the amount expensed in the fourth quarter was $2 million greater than the fourth quarter of 2003.

Added together, the impact of Hubbell 2006 on the fourth quarter of 2004 versus the fourth quarter of 2003 was a reduction of $4 million of operating expense -- of operating profit, excuse me. Despite the added cost, we made an excellent effort, and this was a solid accomplishment for our first full implementation.

The next subject is our cost versus price discussion. Over the last several quarters we've talked a lot about cost increases. Raw material and energy cost increases continue to be our toughest near term challenge.

During the fourth quarter, the cost of several metals rose, steel primarily, but copper, aluminum, nickel and zinc as well, continued to rise. On a year-over-year basis, the group of businesses most affected by the price of steel in their cost experienced a profit margin decline due to these increased costs.

Similar to what we talked about each quarter, during the fourth quarter we continued to announce and implement price increases, but we didn't cover all of these costs. The gap remained of about 4 to 5 million in the fourth quarter, about the same as in the third quarter, and approximately 15 to $17 million for the year. In December of '04 or January, each of these businesses, most negatively impacted in the fourth quarter by the shortfall in price versus cost, has again implemented higher prices to offset these material costs.

However, we expect that the volatility of metals and raw material cost in general will continue to challenge us as we head in to 2005. We will continue to closely manage the situation, and respond with additional pricing actions.

Finally, our tax settlement. Also in the quarter a tax settlement for the years through 2001 accounted for 16 cents of our reported 77 cents earnings per share, which goes back to 2002 and the R&D tax credit refund claim and other regular items.

Turning to the state of our markets, our markets along with the general economy continue to improve steadily. Industrial production, MRO spending and capacity utilization are slowly rising. Utilities are spending more on maintenance and small transmission projects, although the major R&D grid infrastructure investment that we expect will occur over the next few years has still not yet begun. The residential markets remain very strong, but have started to weaken. We, most likely, will see a decline in the rate of new home building with that decline increasing as we move in to the year, although we believe we have plans in place to minimize the impact of any of this decline on Hubbell's business.

The non-residential construction has bottomed, but it is only just recently started to show signs of improvement, but we'll continue to do so slowly. Overall, we continue to view the recovery as slow and steady, but fragile and very much dependent on there being no shocks to consumer confidence, interest rates or further deterrents such as significantly rising material costs. But lacking the shock to the overall economy, we think that 2005 will be an even better year for Hubbell's markets. Now I will have Greg give you a bit more detail on the numbers for the quarter.

Greg?

Thanks Tim. Hi everybody. I'm going to follow our regular format, starting with some overall comments on the quarter and the year, and then I'll add a little more detail to the segment results. Much like the first 9 months of the year, the fourth quarter sales and profit levels continued to reflect good market conditions and solid performance by each of our business segments. The sales increase, 12% for the quarter over the prior year, was where we expected it to be and consistent -- it was consistent with the full-year increase.

Of the 12% year-over-year growth, about 3 points was the effective price increases and that will leave about 9 points what we think was unit volume growth. As has been the case throughout the year, there were a lot of moving parts in our fourth quarter P&L, more cost increases, price increases, a little bit of customer pre-buying in advance of announced price increases, restructuring costs and in general the underlying recovery that our markets are experiencing.

Additional influences on the results this quarter as Tim talked about, you know, were first the effect of the business system implementation, of course we had our first go-live midway through the quarter and number two, the tax settlement. As reported, our fourth quarter earnings were 77 cents a share that compares to last year's 57 cents, but in total, taxes added about 19 cents to the quarter consisting mainly of the book impact of having closed out those open audit years with the service.

We also expensed about $3 million for restructuring in the quarter, that compares to about $0.5 million of expense that we booked in the fourth quarter of last year. So excluding the non-recurring tax issues in '04, and the restructuring in both years, fourth quarter earnings this year were 61 cents a share and that compares to prior year fourth quarter of 58 cents. On a full-year basis, EPS of 251 as reported diluted, compared to reported $1.91 as you can see from last year, but again if you adjust 2004 for the tax items and you adjust both years for restructuring, adjusted earnings per diluted share in '04 would be $2.50 and that would compare with $1.99 for all of 2003. I think that's about a 25% increase.

Getting back to the quarter, fourth quarter operating margins, 10.4%, that's down about a point, both sequentially and year-over-year. And again, as Tim pointed out, there are really 2 issues that combined to drive these comps negative. The first was cost in price. And we talked all year about how we have been managing rapidly rising material costs, in particular steel, by implementing price increases with our customers.

And while the price actions have certainly been unprecedented, nonetheless they have consistently lagged the impact of the higher costs. And that can range anywhere from 30 to 90 days and in some cases even more. We did see more cost increases in the quarter. Again only a portion of which were able to be offset by higher selling prices. And we estimate I think Tim mentioned this that the negative spread was about 4 to $5 million in the quarter, which is on the high end of what we have seen in earlier quarters of the year.

However, going forward in '05, we do expect prices, price increases, realized price increases to offset the higher costs. The second issue, the business system, although we believe again we had a very smooth implementation and that the functionality and controls of the new system are state of the art, the complexity of the process did, as Tim said, impact shipments and plant performance in the wiring businesses, factories.

So if you add to this the increase in the expensed cost of the project itself, which quarter-over-quarter was higher by about $2 million, you get to the $4 million shortfall and operating profit that Tim referenced. And that's close to a full point of margin. Just giving you the numbers on the business system, for the fourth quarter, we expensed approximately 3.5 million associated with the Hubbell 2006 initiative. That's well above both the amounts expensed in earlier quarters of the year and the 1.5 million or so that we expensed in last year's fourth quarter.

For the full year, just over $10.5 million was expensed for the Hubbell 2006 project and over 13 million was capitalized. So that results in a project cost for 2004 was about 23 or $24 million, and that compares to just under $5 million that we've spent through the whole year in 2003. Overall on cash flow, we continue to generate positive free cash flow after payment of dividends, cash and investment balances at the end of the year was $407 million. That's up by just under $19 million for the quarter. And again, that's after payment of $20 million in dividends to shareholders and $25 million that we paid in to our domestic pension plans in the quarter.

Our net debt at the end of the fourth quarter was a negative $108 million. And that compares with a negative $2 million at the end of 2003. So, an improvement of over $106 million for the year. Full-year cash from operations was approximately $185 million, that's down of course from the record high of last year, as higher net income was more than offset by the working capital build that we've been talking about all year, that was necessary to support the higher sales. But a better way to look at it in terms of our working capital is probably as a percent of sales. If you take average accounts receivables in inventories less average accounts payable, again as a percent of sales in 2004, that improved year-over-year by an excess of 2 points, ending the year at a very reasonable 18.6% of sales, again despite the higher investment levels.

For the full-year, we used over $39 million of funds for capital expenditures, with over $13 million spent in the fourth quarter. That compares on a full-year basis to $27 million spent in 2003. This year 2005, we expect total spending will likely increase, although, we would characterize the spending and the increase as strategic in nature as opposed to traditional spending on plant and equipment, new products and the headquarters facilities that we've started to construct in Greenville, South Carolina for our lighting operations headquarters, should push total spending to between $50 and $70 million for 2005.

So on to the segment results for the quarter. The electrical segment's fourth quarter sales up 12% year-over-year, about 2 points of the year-over-year increase was the impact of price increases. And again, as was the case all year, all 4 of the businesses that make up the segment reported higher sales. This quarter lighting's influence on the increase was probably the highest we have seen all year, which is partially attributable to some customer pre-buys, orders placed ahead of a November price increase that was announced in lighting.

Operating margins for the quarter, excluding restructuring, 11.3%, that's down over half a point from last year's fourth quarter and down about a point sequentially from the third quarter versus last year the impact of the new business system and the effect of higher metals cost over price increases in electrical products, lowered operating margins and offset the improvements that we saw from productivity and from the higher volume. And again, we see this as a short-term issue. You know, as number 1 we expect wiring as Tim said, to fully establish its normal pace of business process by the end of March of 2005 and secondly, price increases implemented this month should reduce the cost-price deficit being experienced in electrical products.

In lighting, in our lighting business, residential markets continue to be strong, productivity and restructuring actions in commercial and industrial businesses also continued to produce very good margins for us. We continue to be very happy with the year-over-year growth in sales of commercial and industrial lighting, fixture products up double-digits again this quarter. Some of the year-over-year growth is a result of price increases and a little bit of pre-buys, but most of it is real volume gains. In harsh and hazardous markets, they also continued to improve as we discussed the last quarter, particularly in oil and gas, fourth quarter sales in harsh and hazardous markets in our businesses rose by about 14% year-over-year.

Turning to the power segment, sales were up 16% year-over-year. And again, as with the third quarter, about 5 points of that volume increase related to the impact of price increases leaving a real volume gain of about 11%. A higher utility demand, year-over-year related to maintenance and capital spending continued although at a modestly lower rate than what we saw in the third quarter, but nevertheless, we expect continued strong demand from utilities in the coming quarters. The margins in power, 9.5%, lower than last year's fourth quarter. And that's primarily due to the fact that we're not passing all of the raw material and energy cost increases on to our utility customers via selling price increases as Tim and I both went through a few minutes ago.

Additional price increases, though, have been announced for utility products, those are just becoming effective, so we would expect to recover a higher percentage of the increased metals cost in the '05 first quarter than we did in the just-completed fourth quarter.

Finally in the industrial technology segment, fourth quarter sales up 9% year-over-year, due to higher sales of industrial controls and reels, products that actually benefited from firming steel prices and also some improvements in high voltage test systems shipments. And the segment operating margin for the quarter are 11.5%, that's up modestly from last year and that's driven by the higher volume. And that's despite, the less profitable mix of sales experienced at our GAI-Tronics business, versus a pretty strong fourth quarter of the prior year. So with that, I will send it back to Tim for a little more commentary on 2005.

Thanks, Greg. To discuss 2005, we would expect the full-year sales to come in above 2.1 billion, with a year-over-year growth in the range of 5 to 7%. This includes slightly better than our GDP growth organically, and 1 to 2 points of price carry over from year-to-year, along with some new products. We would expect the full-year operating margin to improve by one full point. Our 2004 -- our 2005 earnings per share is expected to be in the range of between $2.65 and $2.95, and we would now expect to record between 20 and 30 million of restructuring expense in 2005, as a portion of our previously announced restructuring plan.

And these numbers are not included in the 2.65 to 2.95. And as usual, we would expect our cash flow from operations to remain very strong. On our strategic initiatives, we are continuing to pursue our strategy, the pursuit of lean thinking, the execution of restructuring actions across all of our business, a focus on working capital efficiency and low-cost sourcing initiatives. We are making good progress on our lean initiatives. We have transformed the major areas of our business and as a result have been able to consolidate factories and warehouses in to less space. And at the same time, generate process improvements and productivity gains. But we are far from where we want to be.

The more we get in to this process, the more opportunity, we see. 2005 will be an important year in our business system implementation, as we take additional business systems live on SAP. Leveraging the base of knowledge and the skill, we have built up in the company over the past 15 months. Our lighting restructuring actions will continue on schedule and the returns on the amounts, we have invested so far are very satisfactory, as evidenced by the lighting's business financial performance in 2004. But we are also pursuing restructuring actions in other businesses.

Factory consolidations, warehouse consolidations will continue through 2005 and into 2006 in most of our businesses, as the positive effect of lean and low-cost sourcing continues to take effect. We will continue to make progress on turning our inventories faster and there is still a lot of opportunity remaining. We continue to increase the amount of product that we source from low-cost countries, whether it's from our own factories in Mexico or sourcing from third parties in the Far East.

And finally, as you have heard in our financial report, our balance sheet and our ability to finance growth continues to strengthen. In addition to our internal growth initiatives, we continue to search for acquisitions that will enhance our position in our four core markets. We have a history of successful acquisitions and integrating acquired businesses smoothly into Hubbell. We will continue with this approach. We're confident we can find attractive, acquirable businesses that are priced right. In summary, we are very pleased with the progress, we've made in 2004, but we see plenty of opportunity in front of us for 2005. And with that, we would be happy to take any questions.

At this time, I would like to remind everyone, if you would like to ask a question, press "star" then the number "one" on your telephone keypad. Your first question comes from Jeff Sprague with Smith Barney.

Thanks. Good afternoon. A couple of questions. First, just on the price costs, can you give us some color on how much the latest uptick in pricing was? And I was a little surprised, Tim, if I heard you correctly that you said the roll-through on price is only 1 to 2%, as you look into '05?

For year-over-year?

Right. That's the full-year benefit of '04 plus what came in, partial year '04 plus what you're just doing now, is that correct?

No. What I'm saying is that, if you're talking about on '05 versus '04...

Right.

I think that the increase in price on '05 versus '04 will be an additional 1 to 2%.

OK.

That's what I was trying to say.

OK. And how much did you just go up in January?

On businesses like can Rayco and some of our other metals, between 7 and 10%. Now, whether we get all that is probably not a 100% likely, but we'll get a good portion on it.

Right. .

Because everybody is seeing the same problem, we are. And we did have a kind of a stiff tick up in steel costs in the fourth quarter and some price increases in steel that will take effect, January 1. So the unfortunate part is this run isn't over, but I, -- you know, I'm beginning what I perceive is, a leveling off of this and there are parts where the different markets, where certain types of steel on the spot market is getting a bit softer, so that's hopefully a good sign that this is abating. But it's been a long run all year and we're trying to stay right on top of it and unfortunately in this quarter, it got no better than the previous quarter. And that was our, big challenge.

And then the other kind of margin dynamic is Hubbell '06, so where is the peak in the amount that you're experiencing on that program? Did we just pass it? And, you said, you're turning other business units on live.

Yes.

How do we get confidence that we don't have a couple million dollars of head wind each time we do that? I mean, what were the lessons learned in the fourth quarter and what should we expect going forward?

Well, first of all, I think the spending in 2004 will be similar to 2005. And the expense that we have given you, we've calculated an expense in our outlook that is similar to what we experienced in 2004. So, we think, we have accounted for that in the -- how much you have to spend to implement.

Right.

Certainly in each of these go-lives, we expect to get better, and I think -- given the magnitude of this, I think, we did pretty good. But it doesn't come without some adjustment. Now, I think in my outlook for the year, I tried to factor a little bit of that in there too. So I have done the best I can to try to calculate, what I consider to be an improving learning curve with each successive go-live and the amount it's going to take to spend on this, to continue the project. We're still on budget for the overall project and we're still on time with that and we would expect to finish both on time and on budget.

Can you also give us a little bit more color on what you're seeing on commercial construction? You know, new activity versus retrofit and any particular, end markets or type of construction within commercial that stand out?

Sure. We think the bottom has been seen by -- well, I don't know, 3 or 4 months. We think, it's starting to turn-up, and I do mean very slowly. Certainly, there are areas in the south and southwestern part of the United States, where construction is growing. Office space in certain markets in the south is -- projects are starting to happen. There's a few convention centers and things like that that are on the horizon for the next year, and those are markets for us. There is still the overhang of excess office space, which is in the northeast by enlarge and also around the San Francisco area, those markets aren't getting a whole lot better. Although, sooner or later, the trade center location will swing into a massive construction project and that will turn up. But I am seeing office space, west coast warehouse and support that goes with those, as areas, where we would expect growth. Also some industrial construction, but it's at such a low level that even if you get a 10% upswing it doesn't mean much, but the positive indication on the industrial market for us is that we are close to 80% capacity utilization and it's rising and that the construction level on the industrial side, although low, is starting to improve. So both of those abode well for us, along with general capital spending by industrial companies in the United States for which we would supply OEM parts.

And just one last one. The tax rate even adjusting for the one-time benefit looked low in the quarter. What's going on there? And is there any forward change in what we should expect on the tax rate?

Yes. This is Greg. You're certainly correct. I think if you add back the settlement to the reported amount in the quarter, I did mention that we think the effect was 19 cents and so with the settlement being 16 cents. We think there were some normal year-end type adjustments that went in to that 3 cents. I think it will get you back to around 26% rate for the quarter, which is consistent with the prior year fourth quarter, but we don't expect to be quite at that level going forward. We think we going to be a little bit north there for '05.

Right. But do those adjustments imply, so you made some adjustments in Q4 that effectively pulled down the '04 number. Does that mean as you roll to '05 that on a full-year basis, '05 is, you know, any lower than '04 was?

No.

No. OK.

Those are non-recurring and with our Puerto Rico operations continuing to become a less significant portion of the overall portfolio as we grow, we expect the rate to advance a little bit.

To go up.

All right. Thank you very much.

Sure.

Your next question comes from Tony Boase with AG Edwards. Tony, your line is open.

Sorry about that. On your EPS range of 2.65 to 2.95, I wonder if you could maybe give us a little bit of color on what would get you to the high and low end of that range as far as price and volume for the year.

I think if we tracked to the high end of the volume range and we can catch up with the price. We will get to the top end of that range. Certainly, the lower end of the range and a trail on the price cost side will get to us the lower end of the range. We're expecting to do better. Clearly much better in '05 on that whole equation than we have been able to do by chasing the ever-rising cost increase. Also we may not have mentioned that the -- we have not been expensing stock options, but our numbers include expensing stock options beginning in June and that there's how much?

Yes. We have got a half a year under the modified perspective as it looks right now and assuming and we get a full tax benefit for that going forward, that would be anywhere from on a half year basis, 4 or 5 cents.

OK.

OK. Just going back to the raw material and pricing impact, for fiscal '04 you said the gap was between 15 to 17 million. So for 2005 what's the anticipated gap?

It's small. It's mid-single digits. So we're expecting to catch up by a lot. We're expecting not to fully catch up in the first quarter because there's businesses like lighting that still have backlog at old price and some of those a little bit in the utility business, but by about the end of the first quarter if prices do not go farther up, we will be current and I would say we would be for nine months equal right now.

And then did you say how much the pre-buy impact was from a revenue perspective in the fourth quarter?

This is Greg. It was pretty small. I would say 1 to 2% at the most.

And mainly where it comes from is lighting, but there has been so many price increases that the effect of pre-buying becomes less and less. In the lighting industry you're still protecting some jobs that you have quoted, and have been specified and things for a longer period of time, that's the industry practice, whereas other products like commodity metal products would change much more rapidly.

Could you maybe comment on your CFO situation or what the status is there?

Sure, I would be happy to do that. Things are progressing with Bill and that situation and we would expect to have that clarified during this quarter. So we would know how to proceed by the end of this quarter, say.

OK. And lastly, receivables look like they're up pretty significantly, at least from what we had anticipated. What's going on there?

Day sales and receivables are at their historic level. There are more workdays, if you look at the calendar in 2005 in both November and December than there were in 2004 than 2003. So we had 20 workdays for sales in each of November and December, so typically those months are in the teens and they allow accounts receivable to decline at a more rapid rate than they did this year. But the current nature of those receivables is the same as it has been for each and every quarter. There is no change to quality of receivables or anything else.

I guess what I'm getting at is there wasn't a big rush at the end of the quarter for, to get sales out.

No. I mean on a day basis, day-rate basis I would say our shipments are almost constant day in and day out. There's no big push anywhere.

Thanks a lot.

Kind of a business, you have to get it, you have to ship virtually every day, you know, it's a lot of small orders.

Your next question comes from Martin Sankey with Neuberger Norman.

Thank you. That's Neuberger Berman. I would like to walk through some of the 2005, what some of the things that are behind the guidance you spoke of, the Hubbell 2006 expenditures being on a par with 2004 levels. In terms of expense, the expenses, will it be the same? And will there be any quarters where there might be large lumps? Or should we...

We're projecting that the expense portion will be approximately 10 million, like it is this year. And I can tell you that depending on the nature of the consulting determines whether it gets capitalized or expensed. And it's not that easy for us to predict whether it will move up or down by a little bit, but I think that the range that we gave you of spending about the same level will continue. I would believe and I don't really -- no one can know this for sure, but I believe it will be a little smoother than it was in 2004. But the spending, both the expense and capital portion will be very similar levels to 2004.

That's right.

And '05.

OK. And if we -- depreciation expense, given that your capital spending and your capitalized expenses are rising so rapidly.

Yes. We'll see a little more in terms of amortization as the system starts to be, systems costs start to be amortized but depreciation itself should be very much in line with what we experienced in 2004.

Not a whole lot more than '04 because some of the projects we're working on, the Hubbell system itself will start, these portions of it are being amortized, but a lot of the incremental CapEx is going in to a couple of buildings for our lighting headquarters and the expansion of our Mexican plant and obviously you don't begin to depreciate those until you get them done. So they will be in construction in progress for a while.

Right. OK. You mentioned that restructuring will be up somewhat from 2004 levels. Do you have any feel for how that might work through the quarters?

That's probably the most difficult part to call based on all the rules and the announcements. And that's why we really try to stay away from that. I don't know really how to forecast that for you, Martin that -- how it's going to drop by the quarter. We have not been able to do that for ourselves with any degree of accuracy, so I would be reluctant to say something in public because I don't know really how we could forecast it very well for you.

I mean, it's not going to be...

Like all in one quarter and nothing in another. But certainly it's time to events and plant movements and things like that. So, it's a steady pace throughout the year. Some bulges are bigger than others. I don't really know how to get a close number for you there.

Right. And lastly, you have one-third of your debt maturing this year?

That's correct.

And I guess, you'll pay that out of available funds and not refinance for modeling purposes we should assume about a $15 million interest expense?

You would assume we would pay that down, correctly, whatever the appropriate changes are, I'm sure you'll be very close.

OK. I'll get back in line.

Sure.

Your next question comes from Bob Cornell with Lehman Brothers.

Yes. Just fine-tuning some of the other things I mean, I guess, I was a little surprised that you had the step up in materials costs an in this quarter and talking about another step up in January, I mean, how does it bode for those increases few months ago, for example?

Usually, you get about a month's ahead feel for what's going to happen, typically. And it starts...

These are steel cost contracts that came up, I take it?

...the steel industry, I don't know the contracts are worth anything in the steel industry. You can sign anything, but it doesn't matter. What happens is you get about a month's notice of prices going up and then it becomes a matter of negotiation to what extent, that you know, of an announced price increase how much of that rolls-off on you and that depends on where are you to begin with. So, I can only tell you that for instance Rayco steel price by January first of this year will have increased by 100% from October of 2003, double.

Now, some of the companies that I have talked about writing contracts on steel now with downside price protection. Are you guys big enough to avail yourself that opportunity or are you writing fixed price, full year blanket type contracts?

No, we're smart enough to negotiate the ability as prices fall to ride that too.

Now, I think you're going to get a pleasant surprise later in the year?

I'm hoping you're right. I'm really hoping you're right.

You know on the restructuring of 20 million to 30 million, I mean just wondering, is this sort of the regular pace we're going to see going forward, this is a high number? Or low number? And how is the 20 million to 30 million look in the context of over the next couple of years as you continue to lean out the company?

Well, as you know, we made an announcement of a program of this whole series of events, when was it, about a year and a half ago or something -- a year and a half ago. And this is the installment on that program, which was 50 million to 70 million and it mainly is to restructure our lighting business, although there's a couple other plans.

And at the end of this program is the end of what I can see are the major, any major changes to our existing portfolio. I mean, in terms of plant and whatever, anything beyond that would be a minor situation from what I can see. So, this really is resetting most of the lighting business to where it needs to be, outsourcing, move to the south, pure plants, new headquarters with all the engineering sales, marketing people, these kinds of things. That's what's in all the size of that number.

Would you remind me what the number would be for '06? Is '06 the completion or when does it get completed?

Yes. '06 is the completion and it's smaller. 10 million for '06 and that concludes the deal.

You know even though this is sort of unusual, I mean, many companies we follow, are starting to include these numbers in operating earnings. I mean, these are changes in your operations. I mean, I understand it was inspired by the acquisition, but my personal opinion is these are operating numbers and ought to be included in your operating guidance.

If you choose to net those, you can go ahead. We've found ways to sell that and other things to partially offset, as you free up plants and all that, so we have been trying to work both sides of that, sell product line, whatever to, mitigate the cash costs of these restructurings, so we're trying to indicate the progress on the operating side and the huge nature of the change to the way we do work.

Yes. Just one thing that hasn't come up lately. You go back, Tim, a couple years ago, and you were talking, you had some goals with regard to increasing the size and scope and scale of the company, you made the LCI acquisition and a number of companies now talk about a decent pipeline of build on acquisitions being available. You guys have been pretty quiet on that, the acquisition front, you say your net debt is negative. I mean why haven't you been a little more active in the program that, as you said, you were talking about two, three years ago?

I would tell you that behind the scenes we are as active as we ever have been, but we are disciplined in what the opportunities need to be and where they need to fit us exactly. And certainly, had any of those come along in that timeframe, we would have availed ourselves of them and we continue to look and we got a couple small things in the pipeline right now. So, I can assure you we are very interested, that we still have exactly the same goals and ambitions as we have had and we're looking for ways to achieve the targets that we set.

Just before I get off, I mean, I think you still -- do you have a guidance for the first quarter? I mean we have some of these issues around price and cost heading in to the first quarter and restructuring. I mean, you know, how does the first quarter look in that regard?

We don't really give guidance on a quarterly basis. And we don't want to begin that practice. I would tell you that, it will be a little tougher on margins than what you would expect, full hundred basis point improvement. But you could use the average model for volume increase, and come up with some fairly accurate numbers. I don't want to, you know, go in to that precedent, because there are too many moving parts for us.

OK. We'll give it a try. Thanks, Tim. Great.

Again, I would like to remind everyone, if you would like to ask a question, press "star", then the number "one" on your telephone keypad. Your next question comes from Robert McCarthy with CIBC World Markets.

Good afternoon, gentlemen. How are you doing?

Good. Thanks.

Good. I wanted to get a little more color on to power systems segment in terms of, I think, you alluded to increased strength from utility customers. Could you give a little more color on that, and then, in particular on the international side, where you're seeing strength, because I think, you do have some leverage immodestly towards China and Latin America.

Well, I mean, just talking about the international side, one thing the weakness of the dollar has made our product more competitive in the world market, but most of the product is sold where American influence is, you know, so it would be Taiwan, it would be Australia, it would be parts of Europe and China has not been a place yet, where we have been able to sell product, because the local price of those products are extremely low. So, you really would have to manufacture utility products within China to make the cost targets you need to do to be successful.

Yes. Excuse me, I meant Asia. And then, could you talk about perhaps just is there any sense of increased political will with respect to potential energy bill? Has there been any kind of incremental commentary on that?

I believe it will be a priority for the president, and I believe it will get passed in this congress, and I believe it will still be a year before regulations are such that utilities will begin to open up their purses and get, you know, they got projects on the line, ready to go, but they need a guaranteed rate of return, so that the public utility commissions will agree to let them proceed. And they are in better financial shape. They're not in perfect financial shape, but it's steadily getting better. And so, I would expect that, if we get this -- we got to get through that first step of getting legislation, and I think that's coming with this congress.

Understood. Finally, with respect to, what you're modeling, I mean, obviously you're looking at some of the broad-based economic assumptions, what economists are looking at. But do you have any explicit bias or forecast for what you're modeling for oil or the dollar or could you talk about the sensitivity, your guidance to those two variables?

Certainly, we're not expecting oil to go higher than where it is. We would expect some moderation of oil prices and that's part of, we're not looking for it to go back to where it was, but in the lower 40s, where it would have to, gradually decline to without causing us more heartburn in our forecast. The dollar doesn't effect us so much because we manufacture largely within our, in this North American dollar envelope, and most of the sourcing we do is in China, and so far there hasn't been any difference in, the currencies.

I was just thinking more about the indirect fact on productive capacity for overall capacity utilization for the US industrial base. In other words, the overall competitive landscape for them. I guess it's an indirect effect, and just kind of a second or third derivative question.

Well, if you're asking me about the strength of the industrial market in the United States, is that the question?

Yes.

OK. It is steadily strengthening and capacity utilization for us is still the best single measure, along with there's another index of total people working in manufacturing, and the hours per week worked, including overtime. And if you calculate the number of hours worked, maintenance and repair is almost a direct function of the number of hours worked. So, those are metrics that we follow, and are steadily strengthening, and we believe the industrial market in the United States will get better, by 6 to 8% next year, including the price.

OK. Thank you for your time.

You're welcome.

At this time, there are no further questions. Presenters, are there any closing remarks?

No, other than to thank everyone for joining us today and to thank you, Patrice, for doing such a good job.

Thank you. This concludes today's fourth quarter and full-year 2004 earnings release conference call. You may now disconnect.

CONFERENCE CALL CONCLUDED